Why Whole Life Insurance Is a Bad Investment
A while back I wrote about the mistakes I initially made when purchasing life insurance policies for myself and my wife, and one of the things I mentioned was that at the very least I was relieved we had avoided buying whole life insurance. In response, a reader left 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 was a great point. 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 explain exactly why whole life insurance is a bad investment.
Some background on whole life insurance
I have an entire comprehensive guide dedicated to the importance of life insurance, determining your life insurance needs, and how to buy an affordable policy. There’s no doubt that life insurance is a crucial part of securing your family’s financial foundation.
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. And in my opinion, this is the only type of life insurance that most people should consider, since the financial protection provided by the death benefit is the entire purpose of life insurance.
Permanent insurance comes in many different flavors, but the primary one is whole life. That’s what we’ll be covering in this post, 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 generally not a useful product. It is MUCH more expensive than term (often 10-12 times as expensive), and most people don’t need coverage for their entire life. The primary purpose of life insurance is to ensure that your children have the financial resources they need to get themselves to the point where they can provide for themselves, so coverage that lasts your entire life doesn’t make a lot of sense except for a minority of cases that are the subject of another discussion.
But whole life insurance is often also sold 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 here.
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 these salesmen 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. For example, a policy may have a “guaranteed return” of 4%, but when you actually run the numbers using their own growth chart, after 40 years the annual return might amount to less than 1%.
There are a number of explanations for this difference, including fees and the way in which the interest rate is applied. But the bottom line is that you can’t 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 often get better guaranteed returns from a savings account or CD that’s also 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 about 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 deliver 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:
- 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.
- 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.
- 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:
- 401(k)s and IRAs, with their penalties for early withdrawal, are 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’ll talk about below.
- With a Roth IRA, you can withdraw your contributions at any time without penalty. You generally shouldn’t do this except in true emergency situations, but it’s an option that’s available to you.
- 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 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, and possibly 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 with whole life than with other investments.
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.
First, 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? Of course not. So the interest keeps accruing. And that interest applies to all money withdrawn, including your contributions, which were already taxed.
Second, these loans reduce the death benefit of the policy, which may or may not be important to you.
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.
So no, there aren’t “taxes” applied those to loans, but there are plenty of costs. Whole life insurance policies are fraught with complications like this that the salesmen never tell you about.
Reason #7: Lack of transparency
Whole life policies include many fees that are never explained to you. There’s the commission to the salesman. There are administrative costs. There’s the cost of the insurance.
I challenge you to find an example of a whole life illustration that clearly details 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 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 these policies often don’t understand how they work. One salesman, after I asked a number of questions he didn’t know the answer to, 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.
Is that really the kind of person you want to trust your money with?
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. Just about everyone has the option of contributing to 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.
And 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.
Whole life insurance is a bad investment
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. So 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 most people, whole life insurance is a bad investment. You’re simply better off investing your money elsewhere.
Update 3/16/2016: For those of you who are interested in “banking on yourself” or “infinite banking”, financial planner Michael Kitces wrote a smart article explaining the major flaws behind these strategies. You can read it here: How Life Insurance Loans Really Work And Why It’s Problematic To “Bank On Yourself”.
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.
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.
Hi Matt how does whole life insurance differ from Northwestern Mutual adjustable comp life insurance Thanks
Good question Lisa. I’m not an expert on Northwestern Mutual’s policies so I can’t give you a precise answer. But I believe that their adjustable comp life insurance policies allow you to combine term and whole life insurance in various proportions based on your desired outcome. In other words, it’s a more flexible policy than typical whole life insurance.
Interesting perspective.
I think what happens is you look at mediocre or terrible whole life policies or maybe just a mediocre or average design and then compare it to the best of alternatives.
I did an in-depth analysis awhile back showing the exact opposite of what you presented here. If you adjust for risk tolerance, and look at the best policies on the market, they’re not only competitive, they’re good. And, what I found corresponds with the research currently available about whole life vs BTID. Namely, sometimes, they’re better than a traditional 60/40 split portfolio (though I’d be hesitant to make that comparison as a blanket rule).
Have you shared this analysis anywhere David? I would love to dig into a thoughtful and comprehensive view from the other side. Nothing I’ve seen yet has been convincing.
Yep. Here’s one analysis I did:
http://www.monegenix.com/term-vs-whole-life-insurance/
Keep in mind this is not comprehensive and only deals with a narrow issue: the question of a basic whole life vs BTID analysis. If you’ve got any other questions, I’d be willing to address these on your blog if you wish.
Hey Matt this is cute, glad you had time to explain many bullets that are very misleading and incorrect on your part. Are you an expert? Are you licensed? If the answers are no then stop blogging and keep your opinions to yourself. You can affect many who actually own it and it has done wonders for me specifically
I’m a Certified Financial Plannertm.
Almost too much false information/lack of understanding here to even try to tackle. You do realize participating whole life/phantom loans are one of the MAIN ways that the wealthy keep their wealth, avoid taxation and funnel income into an investment vehicle right? The hiltons have been doing it for years as well as virtually every wealthy family manager out there. The lack of understanding most people have regarding these policies, is why they advise against them. They themselves do not understand.
I have no idea how the Hiltons manage their money, so I can’t comment/fact check what you’re saying here. But in a broader sense, the right financial moves for the wealthiest 1% of Americans are often much different than the right moves for the other 99%. If you’re already incredibly wealthy, then sure, a well-designed permanent life insurance policy can make a lot of sense. If you’re trying to build wealth, then no it usually doesn’t.
This. LIfe insurance salesman like to talk about rich people who swear by life insurance as investments, even while they are selling to people who are barely making it. There is a difference between “investing” and gaming the system; and only people with a lot of money (and the people who facilitate them) need to know about that game.
I’m stuck with whole life supposed to be paid off now. Have to pay high premiums now . Should I take a paid up policy. Can’t pay those premiums!!!
I’m sorry to hear that. Shoot me an email at matt@momanddadmoney.com with a little more information about your situation and I will be happy to help if I can.
What if you’re not trying to build wealth and don’t care about yourselves at all. What if the main goal is to set your children up for financial freedom for when you DO pass. WhenEVER that may be. We are newly looking into this. We have no clue how to start. Also, does whole life premiums increase as you age, or are they locked in like term?
Good question Sarah. If all of your other goals are completely on track and you have extra money that you’d like to use for that purpose, then some kind of permanent life insurance policy could work. That decision should be part of a larger conversation with a good estate planning attorney though, and you’d likely want to ensure that the policy is designed so that you’re only paying for the features you want and there aren’t any unnecessary fees. This is a fairly specialized scenario and I would be very careful about which professionals you trust to guide you in the right direction here.
As for premiums, they can remain constant for life and even potentially disappear at some point depending on the policy design and how you manage it over the years.
The author of this article has obviously not been exposed to the details, and perhaps unaware of the Canadian versions of whole life. His comments are just wrong on so many levels, it would take a book to refute them. To make such a blanket statement that all whole life policies are bad, is equivalent of saying because one BMW 750 was a lemon, don’t but one because they are probably all lemons. It is the application of these policies that is critical to understand, and yes they can be sold by inexperienced or crooked advisors looking after their own interests, but whole life has many positive applications both for individuals and especially for corporations.
It would be more like saying don’t buy a car with a high rate of defects. Even in cars with high rates of defects some last a long time. Personally, I still wouldn’t buy them.
Matt you are a CFP? I am as well, Consider CLU, I have story after story of how whole life has saved clients businesses, families, and strengthen next generation wealth….. I also have my CFP and knowing you have it as well i don’t know I just feel as though it is devalued now.
via GIPHY
There are certain instances where whole life can be useful.
SINCE YOU ACKNOWLEDGE THIS, THEREFORE,
1. The title should not be “Why Whole Life Insurance is a Bad Investment”. Could use: “sometimes”, “some”, etc.
2. Again, as pointed out countless times in those comments: DO NOT CONFUSE LIFE INSURANCE AND INVESTMENT (with a capital “I”), in some sense life insurance can be an “investment” (with a small “i”)
3. Again, Canadian experience and U.S. experience are so different in many ways when it comes to financial planning
4. Proponents of Term policies either are honestly misinformed or intentionally misinforming: if life insurance is used for legacy or final expenses (at death), do you really know when exactly you are going to die?
5. To the author of this article: kindly post an article about Whole Life policy being “useful”, as you acknowledged.
Good luck, guys!
What about using a Whole Life Policy for the purpose of Investing in Turnkey Real estate? I do have a 401k policy, but after seeing what 2008 did to those gains, and again during this COVID 19, I’m just tired of not having any control.
I would be extremely, extremely careful before venturing into anything like that. Real estate also tanked in 2008, and even without a recession this would be a risky proposition.
Ok, thanks for the reply and the Caution!
A very good article. Congruent to the philosophy in which our company was built: Buy Term, Invest the Difference. I am a crusader at heart and I am peeved every time I see these products in the hands of people who can barely afford it and whose life will be completely damaged for merely owning it because they are grossly under-insured when they could have well purchase a proper term amount for the time they need it.
So you’re telling me a whole life policy worth $30,000 with a $20 premium is worst than having a $30,000 term life policy that will increase from $20 to $100? Why is it better to gamble with your death when it comes to making sure your family has the money to bury you for a lifetime instead of for a period of time?
Good questions James. I have two main responses.
First, a term life insurance policy will cost much less than a whole life insurance policy with the same death benefit, often around 12 times less. So your example of a $30,000 whole life policy with a $20 premium compared to a $30,000 term life policy with that same $20 premium is not a valid comparison. The term life premium would be a fraction of the whole life premium.
Second, if you are taking care of the rest of your financial plan and saving money, your need for life insurance should eventually disappear. You can read more about that here: The New Parent’s Guide to Life Insurance.
I have found what James is saying to be true though. Term life through the company I got the policy from would be $25 or $30 for the same coverage that I am paying $50 for whole life. And every year it keeps going up, so locking in those rates was helpful. Also, even though it was a meager amount, when I purchased the policy, I would have had to have lived 83 more years to pay the same amount out. Which means if I die anytime before age 100 or so then I’m going to get something more from the company than what I could have put back on my own. Is that not considered a good deal, even if I’m not considering it an “investment”? Or is that the wrong way to look at it and I should just be saving my $50 every month?
I don’t know the specifics of your situation Aimee, but a term life insurance policy is often 8-12 times less expensive than a whole life insurance policy for the same amount and that premium is fixed for the duration of the term. The premium will eventually start going up, but that’s only if you want to keep it in place past the length of the original term (e.g. after your 30 year term has expired).
To add to that, it’s often the case that you no longer need life insurance past a certain point. If you no longer have people who are financially dependent upon you (which typically means that your children are grown and able to support themselves), then what is the life insurance for exactly? Life insurance does not have to pay out for it to have been worthwhile. It simply has to have provided financial protection during the period you needed it. Paying for it past that point is generally not helpful.
Regarding your concern. I work in the funeral industry and a lot of people don’t know that you can do a pre-arrangement with a funeral home and make small payments and have everything paid off in 3,5,10 years. The beauty of this is that it locks the price in place and garantee the service to your family. About 20-30 years ago our funeral home started to sell these contracts for 195.00 total. Now when the person passes away. The 195.00 cover transfer, embalming, service and a casket. This service is close to 10k
I always tell people to look into prearranging, because no one will ever have to figure out what you wanted. It’s already done for them, and often times it’s all paid for
What happens in the case where the Funeral Home goes out of business between the purchase and the need – Seems to me like you would be out what you paid. Not sure I am willing to take that chance.
I don’t like to see clients who can barely afford their life insurance coverage in policies that provide them with too little for their needs either, but the “Buy Term, Invest the Difference” philosophy (force-fed en masse by crooked Suzie Orman) is a reckless term as most people will not fulfill the latter part of that philosophy. It’s in life’s nature to allow things that are not required of us to fall to the bottom of the priority list.
The fact is, every. single. client. has different needs and different budgets. A good agent will always keep their best interest in mind and try to find the product that best suits their coverage need while making sure they can afford it.
And let’s face it… someone paying $130/mo. for a 20-Pay Whole Life Policy with a 20-yr $250,000 term rider attached to it, while concurrently paying $250/month for cable TV and $600/mo. on comfort/convenience/entertainment items, well… if they can’t afford that $130 life policy, then there is a disconnect in their personal financial behavior that we cannot solve for them. “Investing The Difference” goes hand-in-hand with that behavior. Life gets in the way, and things that are REQUIRED to be paid tend to take precedence over things that we SHOULD be paying (ourselves). We can’t make them do it, and term life insurance might only be half of a solution without it. Who are we helping in that case?
I find it interesting that you seem to ridicule your clients’ financial discipline while at the same time assuming that they’ll be able to maintain a fixed monthly payment on their whole life insurance policy throughout all the ups and downs that life will inevitably bring. Because if they don’t maintain that fixed payment, they will lose not only their coverage but all of the “savings” in the policy as well. And in any case, if they do have the room in their budget for that life insurance premium, wouldn’t it be a whole lot easier to spend a few minutes helping them set up an automatic contribution to their 401(k) or IRA for the same amount rather than making them apply for a whole life insurance policy?
I find it interesting that you see ridicule instead of realism. You know that the pattern I speak of is historically and statistically accurate, so why would you turn my comment into me “ridiculing” my clients?
And I certainly can set up a client for extra payments to their 401k/IRA, however, that’s assuming they are not already maxing out that option. Additionally, if a whole life policy cancels, the client does not lose the accumulated cash value, so I’m not sure where you’re getting that. Not to mention, that I did use a 20-Pay policy as an example which has no payments after 20 years.
Obviously, I heartily disagree with the generalized premise of your article on the whole life policy. While you do make some valid points, and I agree it is not for everyone, to say it is not for most is quite a stretch.
If they’re already maxing out all of the tax-advantaged investment space available to them, and if they are already on track for all of their other financial goals through other means, then it is possible that a specially designed life insurance policy or annuity could serve as a useful savings vehicle. But that is a very rare situation, and even then it is often better to simply invest within a regular brokerage account because of the flexibility and the cost. So no, whole life insurance is not a good idea for the vast majority of people.
This isn’t entirely accurate. Whole life insurance isn’t a product designed to replace term insurance. It wouldn’t make sense to have a retirement account disappear in the event of someone passing early. This would be irresponsible on the part of an agent to suggest this. Whole life has to be used with the intent of using it as collateral for loans, enhanced retirement and for leaving a legacy. In the early years it should be set up with a term rider to ensure a family’s needs will be met. Yes this is more expensive but it is a tool with an objective and if that’s not the objective then whole life makes no sense at all. It is not right for everyone.
Another thing that isn’t true is the taxation issue. The ACB of a policy only comes into play on a policy loan. If the policy is collateralized then up to 90% of the CSV can be accessed as a line of credit, while your csv in the policy continues to grow sheltered from taxes.
Also, during your life if the policy pays 4% and you take a loan against the policy (for any reason) the net effect is that you are paying yourself the 4%, and perhaps 1 or 2% to the insurance company. CSV collateral loans typically are cheaper than unsecured loans, or auto loans. Used properly the whole life insurance contract is one of the most versatile wealth building tools.
For anyone interested, here’s a good explanation of how whole life insurance loans really work and why they’re not the cure-all that they’re made out to be: How Life Insurance Loans Really Work And Why It’s Problematic To “Bank On Yourself”.
Be sure to read all the comments and draw your own conclusions in The “How Life Insurance Loans Really Work And Why It’s Problematic To “Bank On Yourself” link.
Kitces generally posts decent stuff…but he doesn’t actually point out any new revelations or a negative that’s not already known or hidden by the BOY crowd and their clients.
In fact, he sort of torpedoes his argument by saying policy loans are legit, with the implication being policyholders are going to get into trouble if they don’t understand how to use policy loans. …but people already get into trouble by not being financially responsible so…again…nothing new. The problem isn’t borrowing or insurance. It’s financial education.
Well said, David.
Good Stuff Matt Becker!
As a former life insurance agent who has studied this stuff:
Why is LIFE insurance targeted for an expensive “extra” called WRONGLY “savings”.
Point One: Just imagine if your car insurance salesman said to you. We have a basic car insurance where your car is covered but we have a premium car insurance which you can use to save money for retirement! Would that happen? What would you think of a car insurance salesman who tried to wrap up a “savings” plan into car insurance???
You are trying to buy insurance NOT “SAVINGS”. Savings even in a bank or credit union are free! You do not have to pay for them AND they will pay you!
Point Two: There is NO SAVINGS in literally 99% of all whole life or cash value policies! In the event of the death of the insured, the LIFE INSURANCE COMPANY TAKES THE SAVINGS TO PAY OFF THE FACE VALUE OF THE INSURANCE!!! The only person who saves money is the agent and the insurance company. The insured or beneficiaries saves nothing! There may be a few divergent exceptions with cumbersome addons, but NO SAVINGS TO YOU is the result.
All third-party-non-connected to a whole life cash value insurance company financial gurus recommend term life because you can afford the coverage you need until you do not need it any more. Dave Ramsey, Consumer Reports etc.
Point Three: One of the catches of the whole life agent is “Whole life insurance never expires!” Okay let us imagine a house insurance agent selling you an addon savings plan to your house fire insurance. Say you eventually sell the house and move to an apartment. Now would you want to keep paying house insurance when you DO NOT HAVE A HOUSE ANYMOFE ??? 🙂 Or paying for car insurance when you no longer have a car??? So why would you want to keep paying for a poor savings plan that only saves the life insurance company any money??? 🙂
It’s astonishing how uneducated the author and even some of the people who are commenting truly are. As a CFP, CLU, CHS , and Ch.FC , been in the market as a non-commissioned advisor for many years. From a non biased point of view. All I can say is that in Canada – this article is without any merit. It’s just wrong.
If you need life insurance (which in order to find out , you must ask yourself one question : am I going to die ?) a Whole Life Insurance policy is a non-risky , non-volitile way of earning a high rate of return with a very conservative risk portfolio. A whole life policy is part of a healthy financial portfolio. It grows with preferential tax treatment and pays tax free to your beneficiary or estate. In nearly every case of par Whole life if you are under 50 you will have a cash surrender value equal to 100% and up to 800% of the premiums paid.
Let’s consider th facts. Over the last 25 Years , SunLife participating WL Insurance has been consistent around 9.7% interest. That’s compounding annually. 25 year old male , Guaranteed minimum death benefit $150,000 . At age 65 the death benefit will likely be $650,000 , potentially $700,000 and if the market went way downhill and crashed $350,000. Guess how much he paid over the 20 year premium payment period (20pay WL) =$79,980 . That’s a contractually guaranteed – total cost for that $150,000 guarantees death benefit . It’s already much over 100% of his money back. With cash value , with loan ability (tax – free policy loan interest rates are on average in Canada right now 3.5%) . Ok? Making sense at all? Seeing any benefits to this concept anybody? So tell me , an investment of let’s just round up and say $80,000 that a 25 year old male will pay over 20 years. Guarantees him a minimum cash value of $68,900 contractually guarantees minimum. But , with the additional dividends he will actually have something like $129,000 . If he died two months into it the death benefit is $150K . When he turns 65 his investment grew on a tax sheltered basis from $80K to $390K , then if he does die they pay the $150K plus the cash value of $390K all tax free entirely to his family or his estate.
Of course if you are 50 you’ll break even or be about $15-30K ahead of your principal . Depends on which carrier.
INSURANCE COMPANIES DO NOT TAKE FROM THE CASH VALUE I HAVE NOT IN 30 YEARS IN THE BUSINESS EVER SEE A CASH VALUE GO DOWN. It goes up. And you can count on it . It has to be the most valueable , and reliable form of insurance that ever existed and lucky for us in Canada the insurance companies are tightly monitered and re-insured . It’s as safe as investing gets.
PLEASE – ask your broker for an illustration , contact an insurance provider for financial statements and records- these are not falsified they legally must disclose the numbers . If I had the time and brain capacity I could debunk every myth this author has presented irrefutably .
Stop doing a disservice to the public and take this down.
I appreciate your input Steven and stand by all the original points made in the article. Enjoy the rest of your day!
Matt:
I don’t find Mr. Taylor’s arguments persuasive.
Still, although I believe that persons without adequate income either to fund adequately retirement vehicles or to pay monthly bills without using a home equity line of credit or leaving any credit card balances unpaid, should probably only purchase term insurance, if you earn more than that, I am thinking that purchasing 15% to 25% of needed life insurance coverage though whole life policies may be a way to mitigate against the needed guessing that goes into picking the length and amount of term policies. Do you agree?
As to me, I am a commercial, non-insurance attorney who tries to be an “informed” consumer of financial products. 27 years ago, when I already was carrying no credit card balances and was funding my IRAs and 401ks in appropriate amounts, I, along with other of the partners in our then small law firm, purchased a Universal Life policy on my wife with Manufacturer’s Life (a mutual company) purchased now by John Hancock. Over the next 7 years, I purchased laddered term life insurance policies for my wife and I with terms designed to expire between our ages 55 and 72 (so our coverage would drop as our savings increased). The universal life coverage was for about 8-10% of our total aggregate insurance coverage.
Now, it turns out that we have higher, broader family obligations than I anticipated 20-27 years ago. My wife and I plan to possibly keep working past 65 (which I hadn’t anticipated) and would like to be able to fund these obligations even if we were to die before our now planned time to stop working (that goes past the periods anticipated by the terms of our term policies). Our term policies and term coverage are beginning to expire and due to certain issues, at best, we would have to pay very high premiums for anything I would try to purchase now, if we would qualify at all.
As to the universal life policy, I don’t have data as to how much I paid in the early years before the premium vanished. But the premium reappeared around 2011. Still, over the past 4 years (for which I have full records that enabled these calculations), paying the premium has increased the cash value each year by over 5% in addition to the premium amount itself, and has increased the death benefit by 120% or more of the annual premium, making it worthwhile to me, at this point, to keep paying the premium on this policy.
Moreover, with hindsight, because I suspect that the conversion options in the term policies, as I look into them, won’t prove all that attractive, I am thinking that it would have been optimum to have had universal or whole life coverage for closer to 20% of our aggregate, total original insurance coverage, rather than 10%. Still, while I am pretty satisfied that my prior decision-making was close to right, I do wonder if you see this all very differently.
Thanks.
I can’t honestly comment on whether you made the right decision for your personal situation because there are many variables I don’t know. I will say that even if you are happy with the way it turned out, which in the end is really all that matters, it is still possible that other routes could have worked out better. I will also restate my position that while some kind of permanent life insurance coverage can be useful in rare and specific circumstances, it is generally not a good idea for most people in most situations.
how bout if your only income is an SSi check and in my 60s. And I was examined throughly to apply for term insurance and it seemed to me that the cost was too much. So I find that paying even $48 per month for a $10,000 policy gives that much security. I don’t know where you invest 40 dollars a month and get that return. You seem to be saying that there are places but it seems you have To have a thousand dollars at least. So that’s hard to understand. When there is only small amounts of money, what can a person do? I do not see this question. Let me know what I can do to improve that. I’m curious to know.
Your comment that people “….and most people don’t need coverage for their entire life. The primary purpose of life insurance is to ensure that your children have the financial resources they need to get themselves to the point where they can provide for themselves, so coverage that lasts your entire life doesn’t make a lot of sense except for a minority of cases that are the subject of another discussion……”
MOST PEOPLE don’t need coverage for their entire life? Why would that be? Do you assume that MOST PEOPLE are going to invest? Do you believe that MOST PEOPLE will not have changing economic issues? Now more than ever, jobs are much less secure and term life premiums rise every so many years – although the benefit is more for many people the fluctuations in premiums is not good a good choice. I am 65 this year – and I have had economic difficulties forever! I do not look at insurance as an investment just to pay off my final expenses. But, i sounds like t=you are thinking that MOST PEOPLE expect to die when their kids are less than college aged! after they are adults – then THEY are responsible for their own expense’Term life is for what I would call ‘premature death’ when you do have kids at home etc. But if people do not need insurance their whole life – then you assume that they have $1,000 – $!0,000 to pay for at least their funeral.
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.
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.
I get a whole life policy for 5k for round $25 per month. I’m in my sixties and I have no investments although if I work again maybe I will. But how can I pay $25 a month and have a guarantee of money there at the end.
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.
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.
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.
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.
I am 50 and have a $10,000 term policy which expires at age 70. It’s $11.49 per month but by the time I reach 60 it is 38 per month. I can get a whole life policy for 26 per month locked in for life.Seems it would save me money later. BTW I have about 45000 in other term policies
What will you need the life insurance for at that point? Would you be able to save $10,000 in a savings account between now and age 70 instead of paying for whole life insurance? If you take the $26.50 difference in premiums that you mention here and put it into a savings account each month, you’ll have about $7,782 by age 70, assuming 1.5% interest. If you can increase that monthly contribution to $34.25, you’ll reach just over $10,000 by age 70. And that money will be available for whatever you or your family need, any time you want.
Matt, you nailed it! Thanks!
Reviewing now and feel like we were suckered into whole life. We have 2 kids for which we bought within the year of their birth. Their policies are now 12-13 yrs old through MM. Monthly premium payment is approx $30. Today’s cash value per policy, we were able to save that same amount in 10 months in each of their own savings accounts. My kids are very healthy, no issues. Since we signed up for each one, we’ve never had any further communication or follow up from the agent. We’re greatly considering stopping their policies, cashing out, and applying to their savings accounts. We’re both in our late 40s and will maintain our current term life.
I have seen policies where the client does not see any money in their “savings” for at least 4 years…it is ridiculous. Earning a living ripping people off is a no-no.
My experience is the opposite. If there is no investments and 25 dollars a month guarantees 5,000 dollar insurance policy, how do you change course. I don’t think Term insurance even has policies at that low amount.
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.
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.
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.
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.
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.
I love the “money goes into a hole” line – that made me laugh out loud! And not because I disagree but because it was genuinely funny.
In any case, I thought I might chime in given that I disagree with your statement about all of these policies being legal robbery. As a disclaimer, I should point out that I agree that unscrupulous life insurance agents definitely do have a tendency to oversell these policies where term life would do, and I do not disagree that commissions are often the likely motivation in many of these cases.
First off, I should mention that I am located in Canada so the financial planning strategies available to us differ from those available to those in the USA. As such, my comments will be more relevant to Canadians.
With that out of the way, I’ll point out that I would not even consider selling my best friend whole life. It’s a rip-off in his hands and I value my friendships too strongly to alienate those I love by selling them whole life. I would however sell it to my wife! Why is that? Well, because the commissions on these policies are HUGE. Between the First Year Commission and the override, if I buy the policy for myself or my wife and just roll the commission into additional whole life, it begins to look attractive. That compounding makes it attractive for insurance salespeople in a way that is simply not available for the average consumer. So when your insurance guy says “oh yeah, I own this policy” it’s probably true…but the value proposition is very different for each of you. Beyond this particular case, I’m not a fan of whole life in just about any situation. Go figure then that half the people who attend the Million Dollar Round Table conferences generally sell a lot of this crap. Take from that what you will…
If someone really does want and need permanent insurance, and that may be especially relevant for those in Canada who own corporations, there are a variety of strategies to which the Minister of Finance is taking the axe for policies issued after January 1, 2017. As it stands now, the absurd inflation of surrender charges in the early years of a policy allow for a maximum funded LCOI (level cost of insurance) Universal Life policy to sock away a small fortune, tax-sheltered. That’s on the way out. But until it’s gone, there are some great applications that take advantage of a policy’s ability to pay out the investment portion of a policy tax free to a beneficiary upon the first death on a joint-last-to-die contract. That’s just one application…this is but one way insurance companies have adapted permanent insurance products to benefit the wealthy and there are many others, but these strategies tend to be offensive to the Canada Revenue Agency and as such their existence is always under threat. Life insurance companies tend to engage in games of cat and mouse in terms of finding and exploiting holes in the Income Tax Act in Canada, such as 10/8 policies or triple back to back arrangements, then the authorities shutter them. Rinse and repeat. This is probably not a bad thing…it exposes and then closes holes in the income taxa act. Frankly, the best use of an insurance policy is as INSURANCE. The death benefit is where the juice was always supposed to be. Not in engaging in elaborate tactics to skirt the rules. This is especially true as what is legal today may not necessarily be legal tomorrow. A lot of highly beneficial strategies amount to playing with fire.
Maximum-funding a corporate owned UL policy only long enough that it can go on premium offset, where the policy returns are enough to pay the premium indefinitely, can be attractive as well. The internal rate of return on such policies inside corporations can make a corporate UL an alternative to fixed income in an era where yield is sparse. Again, not for everyone, but there are applications out there for those with significant estates.
Not everyone needs permanent insurance. But there are definitely cases for business owners, high net worth clients and incorporated professions where benefits can be derived.
I am Also current working toward my CFP as well and I do see some good points. However, what weaken your argument is that you need to include instances where WL is a valuable tool. Your article is bias (as Dave Ramsey is also quite bias) because it is just as easy for me to argue term life insurance is always bad. If that is the case, then no one will buy life insurance and every family will be in financial trouble. You claimed that you are a CFP, and you should know better that you have the obligation to ensure the public is given both pros and cons about all products.
First of all, congrats on working towards your CFP® designation! I wish you all the best there.
Second, I do briefly mention situations in which some kind permanent life can be helpful. I don’t spend much time on them though because they don’t apply to the vast majority of people.
Finally, I would love to see someone try to argue that “term life insurance is always bad”. I would genuinely be interested in seeing how that would work.
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!
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!
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!
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.
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!
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.
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.
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.
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.
Holly, I just turned seventy years old and retired and constantly looking and applying for jobs because my monthly income is only 1,206.00. I am divorce for only twenty eight years and have a learning disabled adult son who has never work. I need a life insurance policy to be around $30,000 to cover funeral expenses and some money for my son to cope. What life insurance company should I chose and should I chose term or whole life? I would greatly appreciate your response. I have no savings. Thank you. Diahann Cambridge
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.
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.
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.
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.
I love your article and am very appreciative of your opinions and aound advise. I am currently 41 yrs old, married, with one child and another on the way. I wanted to get in touch with a fee only financial advisor. Can you give me some references.
Thanks
Absolutely Shawn. I am a fee-only financial planner myself and you’re welcome to schedule an introductory call with me here. You can also find fee-only planners through organizations like The XY Planning Network, NAPFA, and The Garrett Planning Network.
Let me know if you have any more questions. I’m always happy to help!
There are few hybrid Whole Life/Long Term Care policies out there. NY Life has “Asset Preserver” but this is a single premium policy meaning you need to have a large lump sum to put down. State Life has combo Whole Life/ LTC policy that I would definitely purchase over a staright LTC policy.
I bought a universal index plan with rider for chronic and terminal illness but not sure this is a good investment.
Do you have a recommendation of someone to talk to
I could not go into details afraid that i would give out too much information about my family life. However i could tell you that I am the owner of 6 insurance policies that I started in 1988.
After 38 years. i decided to close them all. I have paid so much money into them only to realized that I has nothing to hold onto. Read below and you will understand my action.
My mother’s policy started in 1992 when she was 58 years old and moved to America to live with us. I put $10,000 down and signed a contract to pay $1360 annually. The illustration showed that the insurance will covered until she is 98 years old.
I figured 40 years payment plus 10k would be less than 60K total, just like putting money in a piggy bank i would recoup all my money (include the inflation of the dollar) there is nothing to worry. The money still be there, i could use that money later in life when i really needed.
Two days ago i received a letter from METLIFE stating that my mother’s 100,000.00 policy will laps on 04/11/216 if i do not pay $4999 right away. And in order to keep it active I have to increase the premium from $1360 annually to $7666. The projection for 2017 is $8700 and so on….
They explained to me that due to the economy the cash value in the account was not making good return; and the insurance cost went up. Starting 2007, the $1360 annually premium that I send every October was insufficient. This insurance cost went up faster and faster as she aged. we just did not read the form carefully.
I am currently unemployed so I could not afford 600-700 a month. I called and ask to cancel the policy hoping to get couple hundred back from the $1360 that i just sent last October. Only to find out that her account has Zero left.
The agent was nice enough to advice me to leave the account open, my mom still insured up until 04/11/2016. If I fill out the cancellation form today, i got zero dollar back but lose the coverage right away!
I’m so sorry to hear this Kim. You and your family deserved better and I hope you’re able to get to a reasonable outcome. Unfortunately, this kind of thing happens all too often with these policies. It would be nice if this kind of possibility was made more clear up front.
If there’s anything I can do to help you out, please don’t hesitate to reach out. Best of luck!
Your statements are somewhat misleading. The policies that Kim are describing are likely Universal Life policies, not true whole life policies. True whole life policies have set premiums, not increasing. And the cash value is built off of a dividend being paid by the insurance companies. Many insurance companies (Ohio National Northwestern ?Mutual, ect.) have been around for over 100 years and have literally paid a dividend every single year. Which means that the policy holder is paying the same premium every single year and is also experience growth in their cash value account very single year. When Kim says that her “cash value was not making good returns” she is referring to a policy that is tied to the market, not based off of dividend payments. Whole life is an amazing product that you are confusing with Universal Life
Whether it’s whole life or universal life, the dividend payments are not guaranteed to match what’s illustrated at the outset. I’ve seen plenty of both types of policies that fail to match the illustration.
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.
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.
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.
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.
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.
Thanks for bringing the perspective of a professional. Always helpful to hear from that side as well.
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.
Will do. Thanks a lot!
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.
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.
My question is “why is whole life insurance only meant for the 1 %?”, if 99% of people can put their money into a term policy for years, that earns no cash value once expires and can even be cancelled if you become terminally ill, which is not uncommon now a days with the amount of commercials you see on tv. Can’t 99% afford to put a little more money away and lock it into a cash building policy without the high risk of those other investments that are very aggressive and could cause you to lose all of your cash value. If the 1% is doing it, then obviously there’s a smart reason why. Why are there so many articles against whole life insurance instead of term? Just from life experiences the only time someone needs to talk bad about something or someone else who is being praised highly or is well liked is when they are in fear of the competition.
Those are all fair questions Ashley.
First, legitimate term life insurance policies cannot be cancelled for terminal illness, unless you had the illness at the time of application and failed to disclose it. In that case the policy could be terminated due to a false application. But if it’s something that you develop while the policy is in place, your policy cannot be cancelled.
Second, it’s not a good idea for 99% of people because you can get much better protection at a much lower cost through term life and because you can access much better investments at a much lower cost through other avenues. The 1% aren’t rich because of whole life insurance. It’s just that once you’ve exhausted all the better financial instruments available to you and you still have money left over, it’s at least possible that a smartly constructed whole life insurance policy could be useful.
Finally, I’m not scared of people selling whole life as competitors, because they honestly aren’t competitors. It’s a completely different business. My only aim is to protect people from spending money on something that is more likely to hurt them than help them.
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.
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.
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.
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.
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.
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.
Meant to say layer with term insurance
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.
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.
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.
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.
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.
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.
Matt,
I would 100% agree that whole life doesn’t yeild a great return and in most cases is used inappropriately. With that being said, for the right individuals it is in fact a great product. It can not only be used as a rich mans ira, but also a vehicle to max out pensions, and a great was to save money for college without disqualifying the student for financial aid.
As far as investments, why would someone shy away from investing with an insurance or investment company? If you were to invest on your own, you would still be paying fees. Also, advisors are trained and educated, in most cases people are completely unqualified to invest on their own.
You’re right that it can be useful in the right situations, but those are few and far between. We disagree on a few things though.
First, it is not a very good college savings vehicle. Yes, it removes assets from your estate, which is helpful for financial aid. BUT only 5.6% of assets at a maximum are counted for financial aid purposes anyways (see here), so the impact is small. On the other hand. 50% of income is counted against you, and loans from life insurance plans count as income. Not good. Something like a 529 plan is almost always a much better idea.
Second, when it comes to investing, my experience shows that most insurance companies charge MUCH higher fees than are necessary. And since cost is quite possibly the most important factor when it comes to investing, that matters a lot. I would much rather see people using a simple, low-cost index investing strategy that’s both easy to implement and backed by all the best research we have as the most likely route to success.
Totally wrong. WL (and other types of permanent insurance) is the most versatile estate planning tool available (The New York Life version is excellent). Select the Paid Up Insurance option for your dividends and watch as it keeps pace.
Try dying without insurance if you have an estate of any significant value. Don’t know many who plan to have small estates… so most of us qualify although most will fail because they won’t survive those serious cycles every adult goes through several times in their life.
You don’t get rich “investing” day to day… you get rich taking advantage of both the peaks and troughs of economic cycles. Having access to cheap cash and being able to suspend payments when times require are the hallmarks of a good long term strategy.
Save your money… don’t invest it… unless you’ve first insured that even if those investments don’t work out. Life is a big enough investment as it is… especially if others are dependent on you and particularly if you become wealthy. Term insurance won’t cut it. It will almost certainly be lapsed by the time you really need it. Too many opportunities over a lifetime to miss a payment and then poof… it’s gone.
Hello there , can you tell me if 1 million term life at $ 50.00 is possible ??
please advise ,and also what would you sell to a older individual ? , just term life , not whole life with higher premiums ? also what do you see in universal life as well ? thank you very much
Heather, the rates vary widely depending on the amount of coverage and the applicant’s age and health. The $50 number is just an example at the low end of the pricing spectrum.
For quotes, I would recommend checking out this tool from the website Policy Genius: https://www.policygenius.com/life-insurance.
You can also refer to this post to get a sense for whether you need life insurance at all, and this post to help you determine how much you need.
And if you’d like more personal guidance, please feel free to reach out to me directly at any time. You can email me at matt@momanddadmoney.com or start by filling out a short questionnaire here.
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!
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.
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.
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?
My FA has recommended WLI (along with TLI) and I’m having a hard time seeing the value. Your article seems to support my feelings against it but I’m also skeptical of confirmation bias. So I’m trying to understand the situation in which WLI is useful for ~2% of people.
1. I don’t understand the tax efficiency. This means the DB is untaxed? (why and how?)
2. I see it mentioned that WLI DB can be used for coverage of funeral, etc. How would TLI or other assets not cover that? If WLI is only for top 2% of people (i.e. not people who can’t afford cost of dying), why would they care about a relatively small DB (compared to TLI)?
3. The insurance portion of WLI is so much lower than a TLI, why even consider it insurance? So just considering it an investment where they want me to pay almost $1k/month, there are surely other fixed income investments that make more sense (bonds?) – specially then paired with the fact that the WLI’s guaranteed return is not guaranteed at all.
4. My FA mentioned that people will take out bank loans against their WLI cash value because the bank will offer a lower interest rate than the plan – they’ll use the loan for short term real estate investment or something. Is this legit?
You have good reasons to be skeptical Matt. I would encourage you to try to find a proponent of whole life who hasn’t either bought it themselves (and is therefore confirming their own bias) or doesn’t earn a commission from selling it. It’s tough to find.
With that said, here are some answers to your questions.
1. You are correct that the death benefit is untaxed. But that will not benefit you, only the person receiving it. Beyond that, the savings component within the policy is not taxed as it grows, which is what most salesmen are likely referring to. Any loans you take out are also “tax-free”, but of course there is interest to pay (on YOUR money that YOU contributed). And of course there would first need to be significant growth for any of that to make a difference.
2. Term life insurance WILL cover funeral expenses, but only for as long as it is in place. Whereas whole life insurance does not expire and could therefore cover those costs indefinitely. But in most cases it’s more prudent to simply build up your general savings, which could then be used for anything, including funeral expenses, and only keep the insurance around as long as you really need it. It’s not an incredibly cost efficient way to pay for final expenses.
3. I agree.
4. This sounds the like “becoming your own bank” concept, which is much more of a marketing storyline than it is a legitimate strategy. Here’s a good, though somewhat technical, breakdown of why this doesn’t work as promised: The “Infinite Banking Concept” (aka “Becoming Your Own Banker”): One Actuary’s Commentary.
Hope that helps! Good luck with everything and let me know if you have any more questions as you move along.
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!
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!
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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.
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.
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.
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.
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.
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.
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.
Can you expand how it is helpful for that 1-2%?
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.
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?
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.
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.
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!
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?
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.
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
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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?
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.
Frank
Your “dividends” are not dividends. They are overpayments of insurance.
Dividends are not overpayments of insurance. Mutual insurance companies have investements that produce on a yearly basis and the profits are split amongst the company and it’s policyholders. That’s why it’s important to select a mutual company with a solid financial track record for your Whole Life products.
Dividends are partially overpayments of premium based on actual mortality vs. expected. You can see that explained here. They are also partially based on investment performance, and partially based on actual expenses vs. expected, so it is a mix of factors.
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…..
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.
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.
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.
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
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!
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.
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:
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!
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?
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.
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 😛
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.
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!
Classic sales pitch. Love your mindset though! Nothing you can do but call it like you see it and move on. Best of luck!
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!!!
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!
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.
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.
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!
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
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.
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..
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.
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
Life insurance isn’t meant to be a guaranteed payout. It’s primarily meant to provide your dependents with financial protection in the case that you’re no longer able to provide for them. Here’s a post I wrote on that exact topic: No One Wears a Bulletproof Vest Hoping to Get Shot.
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?
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.
Thank you.
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.
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.
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.
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
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!
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.
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.).
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.
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.
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!!!
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.
Abram,
I say differently because that’s a load of bull. I’m in the life insurance industry and it’s the payday lender of the middle class. Everything about it is absolute garbage.
Just took out my 30 year, level premium Term Policy — My friend, that is ALL 99% of people need secure their futures. The rest is going into very good/reputable mutual funds. I will be able to retire with dignity in 20-30 years.
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
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.
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.
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.
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.
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!
Jesus, you completely ignored the gigantic difference between $13k/year and $13k TOTAL over 20 years that Jordan pointed out.
I’m having a tough time deciding which side of this debate is right. I want to think the “whole term is a bad investment” claim is correct, but there’s no real life examples with actual numbers to prove it one way or the other. I’d love to see an example whole life policy’s numbers and then an alternative that produces a better result.
I’ll start with the whole life policy a financial planner is currently trying to sell me on. It does seem to be too good to be true, so I’m trying to figure out what’s wrong with it. He claims that I put $1k in it each month for 20 years. At around the 10 year mark, the “cash value” meets the amount of money I’ve put into it, and begins to exceed it. After 20 years, I’ve put $240k in, and it’s worth around $550k. That’s the amount I could take out if I wanted to close the thing. And I *believe* he said that’s tax free, but maybe I’m wrong about that… he also may have said something about instead withdrawing a set amount of around $55k each year and that’s tax free? Not sure. But just looking at these numbers and ignoring the death benefit, is that not a good investment? I’ve been maxing out my 401k and investing in mutual funds for more than 10 years and I’d estimate for every dollar I’ve put in, I now have about $1.20. I’m sure some of that has been poor allocation of funds, but even taking that into consideration, it seems pretty pathetic compared to the option of more than doubling my money in 20 years (looking at the $550k out with $240k in). What am I missing?
Sorry for completely going off topic… reading through the comments and the $13k miscommunication pushed me over the edge and I had to comment about it, then just went off regarding my own situation.
You’re right Brent. I did overlook that point. My mistake and my apologies to Jordan.
In Jordan’s case, assuming that all those numbers will stay consistent and that there aren’t any scenarios in which he might need to put significantly more into the policy in order to keep it active (which is possible), then it’s a relatively small price to pay for security that sounds like is important to him. I wouldn’t personally take out the policy because I would rather put that money to work elsewhere, but I could understand the appeal.
As for your point about there not being any real life examples with real numbers, you can review a sample whole life illustration here. Your financial planner that you mention should also be providing you with illustrations that you can use to run the numbers yourself.
On your questions about your specific offer, I would both say that most of the points from this post apply and that without knowing the specifics of the policy you’re being offered I can’t really give any concrete feedback. One thing I will say is that you wouldn’t simply be able to withdraw the $550k you mention tax-free. You would have to borrow from the policy, which would come with interest and potentially other fees and conditions. If you chose to surrender the policy and withdraw the money, the amount above what you have put in would be considered taxable income.
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.
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.
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
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.
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.”
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!
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.
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.
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.
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!
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!
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.
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!
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
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.
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?
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.
What is your opinion on ROP term life insurance?
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.
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?
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.
When it comes time to retire, roll over the entire Pension Balance into solid mutual funds within an IRA. I want to be in charge of my own money — not rely on someone else to pay it.
I will have my wife do this when she retires and let it grow until we need the money. Unless something catastrophic happens, we will be able to pass a lot of this on when we die.
James, be very careful about blanket advice to roll your pension into an IRA. A lot of financial professionals can make money through a transaction like that and you’d likely be giving up guaranteed income for the rest of your life. To be clear, it’s certainly possible that this would be a good move, but you would only know that after a careful and detailed analysis of your specific pension, your specific goals, and the rest of your financial situation.
Good call, Matt. Blanket advice is generally not recommended. But then again, that’s a blanket statement…isn’t it? Caveat emptor!
Speaking of caveats, here is another: my comments are going to be applicable mostly to those living in the Great White North, or “Canada” as the rest of you probably know it. Americans should consult a licenced advisor in their region, preferably by referral from a happy customer.
Regarding pension vs registered accounts: It is hard to know what is better, relying on your pension or relying on an individually held mutual fund account (or some variation thereof using other securities). This would require a close reading of the pension and securities legislation in your region. For us in Canada, a defined benefit pension (prescribed benefits upon retirement based on a formula where the employer is responsible for funding any shortfall) can be incredibly enticing due to the guarantees attached to them. It is the preferred pension and stacks up really well against defined contribution pensions (where employers match the contributions of employees to at least a certain degree and where the account grows until retirement and the pensioner draws down the account and is burdened with any shortfall) but defined benefit plans are going the way of the dodo over here. It’s still available to government employees but most private employers don’t want to take on the risk of having to meet funding requirements. That’s a huge liability on the balance sheet. In any case, pensions have a few benefits over individual savings vehicles. First, they benefit from reduced management fee pricing, thereby improving returns marginally over the course of fund accumulation. Second, they benefit from a longer investment horizon since they are always looking many years in the future as their pension liabilities are long-term by definition. Third, actuaries are required to evaluate pensions regularly to make sure funding targets are established and followed.
However, there may be areas where your pension doesn’t stack up to individual plans. For example you can leave your individual account to a beneficiary but that may not be possible with your pension. Also, survivor benefits may be insufficient or altogether absent. The nice thing about transferring your pension to an individual account today is that with interest rates at all-time lows, the amount the pension has to provide you on exit (the commuted value) is inflated to reflect the larger pool of capital required to fund your retirement years. This means you can leave with a bigger pool of dough than you could in an era where interest rates were much higher and so if things turn around and we find ourselves in a rising rate environment with improved fixed income opportunities, you can make out like a bandit. Of course, things could slide into negative interest rate territory and you could be left years left to live and no cash to live it on.
This brings me to my next point. It is not a bad idea to consider annuitizing a portion of your retirement income. If you can annuitize enough to provide you with funds to meet your income “needs” (spousal annuities are available for lifetime income security) with the remainder invested to provide for your “wants”, you can still have the security offered by a pension without actually having the pension itself.
The comparison for defined contribution vs registered accounts is easier because you are dealing with account values which you can project with a fair degree of certainty, at least within ranges to which you can apply confidence intervals, to the degree market activity can be reliably subjected to statistics (point of contention: this is debatable…otherwise we wouldn’t have return years with standard deviations of 3+). You just project the accumulation and the withdrawal and see which one runs out of money first, then consider the non-financial issues already discussed above. Comparing defined benefit plans vs registered accounts is a little bit tougher. This is where you might want to bring in your accountant or actuary to do the math. They can provide you with the information you need to make the decision.
Regarding insuring the pensioner in a spousal benefit enabled pension: Sure, this is a popular strategy. For an identical monthly benefit, you can compare the cost of a Joint-Last-to-Die annuity (basically a pension) vs an individual annuity on the pensioner. Let’s say the difference is $400/month. Well, if you can buy enough life insurance benefit to support the spouse for life (insured is still the pensioner in this case) and the cost is less than $400/month (or whatever the cost differential is between the two scenarios), you may just do an individual annuity for the pensioner and then if he dies first, the insurance proceeds can support the spouse. If the cost of life insurance is greater than $400/month (or whatever the cost differential is between the two scenarios), then do a joint-last annuity and you’re covered for life.
We don’t have enough information in these posts to make a recommendation. You should meet with a few advisors and get one you’re on the same page with. If they can’t explain why you “need” whole life (remember, there are other options for permanent insurance, including level-cost T100), dump him…you can do better. You should be requesting a few funding alternatives rather than banking on one strategy with different brokers. You need to really do your homework.
Well, that’s another rant in the books. Take care, folks!
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.
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
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.
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
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.
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
I’m glad you found something that works for your situation!
Hi Matt,
Thank you for your article and really speaking to the “lay person.” A lot of things in your article really make sense! I only wish I had read it before my husband and I both purchased whole life policies just last week fronting nearly $20,000 with annual payments of $10,000 for the next 24-years. Shame on us for not understanding the details better!
We are both in our 40’s with 2-young children and already have term life policies. We are a single income family who relies on my husband’s commissions (he is in sales)which are not guaranteed year to year. While he has had a few good years where we have managed to max out his yearly 401k contribution, have money in stocks/mutual funds, Roth IRA and at least a years worth of savings set aside in the event of no income we were recommended to invest in whole life as another investment vehicle. Basically, transferring the money in our less than %1 savings account into the whole life policy over the course of 24-years. It seemed very attractive at the time. We simply wanted a better vehicle for investment than our poorly performing savings account. Our advisor (who does work for a big insurance company) came up with whole life ins. We kept asking what other low risk investments that kept our cash flow flexible we could do and he kept coming back to this one. We are currently trying to get more information from our advisor on how to cancel our policy or do you think it is worth it to leave the $20,000 in the policy and just not make any more contributions? Also, any recommendations on what to do with the rest of our savings rather than keeping it in a low earning savings account, but maintaining cash flow flexibility?
Thank you in advance of considering my questions! I have really enjoyed reading your responses to the various posts.
Great question Jennifer. I’m going to reply through email because of the time-sensitivity here. I’ll be in touch shortly!
I only read the first couple of paragraphs here but so far what you are talking about is universal insurance, not whole life. Whole life builds cash value but the policy holder doesn’t get that money….they can take it out on a loan but they have to pay it back with a small interest rate…the cash value a whole life policy collects is what keeps the policy going and it is why they are able to pay out everything they promised you. No one anywhere ever would say hey how about you pay me ten dollars and I will give you twenty in a week….the whole life policy builds up cash value and between that and your premiums they are able to make the money to cover the whole cost. Term life is exactly what its name says…it only last for a term and will be terminated within a set period of time (usually like 20 years) so when you buy it at 20 and live till 50 you don’t get the money you just paid almost 2,000 a year for nothing….but whole life has to pay out it covers you for your whole life. The reason that the term is so much cheaper is that statistically the person will not die in that set time so they are able to make money off the people who don’t die to cover the select few that do and when you are 50 trying to buy term it is crazy expensive. Everyone has their own opinions and I understand that I am just 99% sure that you are talking about universal insurance which is a mix of term and whole and will soon be illegal because of how shady it is.
Thanks for the comments Olivia and I apologize for the confusion, but I am indeed talking about whole life insurance here. Many of the points are applicable to universal and other types of permanent life insurance as well, but this is primarily focused on whole life.
As for your point about term life insurance, it’s important to keep in mind that the point of insurance is not to pay out no matter what, but to provide protection for the period of time that you need it. The fact that term life insurance doesn’t pay out most of the time is actually a good thing because it means that most people aren’t dying young. And in the meantime, you can use the savings from the cheap premiums to build your financial independence through other, more effective savings avenues.
Hi Matt
I have only read the comments so far as Feb 2014 (tho i will read them all), but i have to say thank you for the article, but more so for the objectiveness and courteous mannerism in all your responses. While there may sometimes be cause for snarkiness or sarcasm on your part, I have yet to see it in your responses. And the fact that you actually respond to everyone (as far as I have read) deserves a huge KUDOS as well. You have certainly given me much more insight to my family’s planning goals.
What is your thought about a company like USAA, a small whole life policy of $200,000 at about $2304 annually at 4.5%? We have other vehicles like Roth and Traditional IRAs, savings, etc. Just curious on your thoughts. I will use the links you have provided too for fee-only planners.
Thanks again for your post.
Thanks for all the kind words Deb! I’m glad you’ve found out helpful and I really appreciate you taking the time to let me know.
As for your question, I don’t believe I’ve ever reviewed a USAA whole life policy so I can’t comment on then specifically. I would simply encourage you to start by clarifying your personal goals and to then evaluate each option based on how well it will help you meet them. With that said, of your main goal is investing for retirement then I would typically encourage you to max out traditional retirement accounts before considering any kind of life insurance.
Finally, if you’re looking for a fee-only financial planner, I have two plugs for you.
First, you can check out my services here. I specialize in working with new parents and other people who are at the stage of building their wealth.
Second, you should look into the advisors associated with The XY Planning Network, who are all fee-only and all specialize in working with Gen X/Gen Y clients.
Hope that helps! And please feel free to reach out any time if you have more questions.
Thanks so much for all the kind words Deb! And I’m sorry it’s taken me so long to respond. I’ve been visiting family for the past couple of weeks and haven’t been on top of comments like I should be, and I apologize for leaving you hanging.
As for your question, USAA is a fantastic company and I would happily recommend them for many things, like auto, home, and umbrella insurance. With that said, I have never reviewed one of their whole life insurance policies and therefore can’t really comment on that specifically. I will say that I would be careful about taking that 4.5% return at face value, as I describe in the post. I would encourage you to run the numbers for yourself to see what it really comes out to.
I hope that helps! And if you’re still looking a fee-only financial planner I have two suggestions for you:
Best of luck Deb!
Matt, may I ask you a question? I have a 25-year old $100K whole life policy with a surrender value of $43K, of which $21K is taxable. I’m 43 years old. Dividends now more than cover the $900/yr premium. Does it make sense to hold on to this? I am torn! I could surrender it and pay off a second mortgage which is at 7.6%… Thank you in advance. Love your site!
Thanks for reaching out Jean! The truth is that there are a lot of variables in play here that make it hard to give you a direct answer. On the one hand, a $43k surrender value after 25 years is not a great return, assuming that you haven’t taken any loans out and there haven’t been any other interruptions in your premium payments. A guaranteed 7.6% return is also really appealing. But the answer also depends on your overall insurance needs, your other goals, the expected performance of this policy going forward, and other investment opportunities available to you. Those are the things I would look at if I were you. And if you’d like, I would be happy to talk things over in more detail. In any case, I wish you the best of luck!
OK, I made the mistake of getting whole life insurance policy for $25000 when I was in my late 20’s. I’m now 63 & have been paying $126/month since then. What happens to the amount over the $25000 I’ve already paid in? Do my beneficiaries get back more than the $25000 death benefit? Should I quit making payments &, if so, what does that mean for my death benefit?
I’m sorry you’re finding yourself in this situation Debbie, but the good news is that you have options. I would first ask your current insurance company for an in-force illustration. This will show you exactly what your cash surrender value is right now, which is the amount of money you would walk away with today if you canceled the policy. It will also show you how that cash surrender value is expected to grow in the future.
Then I would try to find a good, honest, independent life insurance agent who could help you evaluate the policy and show you what your options are. If the death benefit is valuable to you, you may be able to exchange it for a different policy that eliminated or reduced the need for premium payments, which might be a huge help. If you would like some help finding an agent, email me at matt@momanddadmoney.com.
ive been scammed into buying whole life insurance with premium $750/mo come to find out nearly no money in the account. I was advised by my “financial advisor” this was my best investment option. Im out of about $16,000 all down the drain. Im devastated…
I’m sorry to hear that DM. Definitely don’t beat yourself up though, and take heart in the fact that you have options going forward.
I would look at it this way. Consider your policy’s current cash surrender value as cash in hand. If you had that money in your checking account right now, would you:
There can obviously be some more detailed evaluation that goes into it, but that’s really the crux of the question. What would you do today if given those options?
I agree with you, generally. Many of those commenting seem to have forgotten that you focused around whole life as an “investment”. Even though insurance is an investment in it’s own way, it’s shouldn’t be sold as an investment. In my experience, it really only makes sense for more wealthy clients who are doing more elaborate estate planning etc. However, the vast majority of people in their 20’s and 30’s should steer clear of whole life. Selling permanent insurance for “retirement planning” gives the financial services industry a slimy look. The income isn’t “tax-free”. It’s a loan. As you say in the article: if one’s taking it for income are they really going to pay it back…? Plus, if a client is in their 20’s and 30’s their time horizon is perfect for IRAs and the equity markets. May dividend aristocrat stocks have paid high percentages for 50+ years. Lastly, as many agents put their clients first…. others do not. If the premiums on whole life are 10x as high… so are the commissions.
Excellent article with valuable information for whole life insurance policy owners, or those contemplating purchasing them. One word —> DON’T! I am grateful – and proud – to be with a company who was rated by Forbes as one of Top 50 Most Trustworthy Financial services companies. We ONLY offer TERM life insurance.
Whole Life Insurance and any kind of Cash (Trash Value) Insurance is a Rip Off! 1.The Whole Life Company keeps your Cash Value if you die!
2. You have to borrow your own money @ 6-12% and wait up to 6 months contractually to get it. Whhich now increases your already high monthly premiums. If you don’t pay back the loan, they add interest on interest! 3.It takes 3 years to build a dollar of cash value giving you a 0% rate of return for the first 3 years. 4.Any dividends you get back is a return of the money that they over charged you. Bottom Line: Horrible Product that is good for the Whole Life Company and Agent and Bad for the Consumer!
My parents had been paying into a whole life policy for many years and did not pay much attention to the cash balance over that time. When they finally had evaluated what they had in the policy, they discovered the ‘cost of insurance’ on the now older policy had increased so much that the premium they had been paying no longer covered the costs of the policy and the balance needed was being withdrawn FROM THEIR CASH VALUE. Needless to say, the insurance company or their agent did not notify them of this, so a policy that they had paid $75,000 into had a cash value of just $12,000 and was actually decreasing in value. Whole life policies are advertised as you paying the same premium amount for the entire life of the policy, but in the small print they are apparently allowed to adjust for the ‘cost of insurance’. It’s a brilliant scam. Pay attention to the policies you have.
Kevin, what you are describing sounds like Universal Life rather than Whole Life. This is a common problem with Universal Life policies purchased in the 80s, often as a replacement of a Whole Life policy, using then current interest rates and projecting them out to the future.
A good agent would design a policy and premium funding to withstand periods of lower returns.
Hi Matt, I m so thankful for “finding” you tonite, after so many weeks debating whether I made the right thing when I purchased my WHOLE LIFE about 1 year ago, and for some reason, I didn t feel right inside, and this funny feeling kept me thinking and doubting my decision.
I ve been thinking about canceling it, I m paying $360 per month for $130.000,00 and when I got it,as a single mom, I was thinking about my son, who is now 23, and living here in NYC.
I on the other hand, got married and moved to England,I m not working at the moment, since I have to wait for my spouse documents to be legalized before looking for work, about 6, 7 months, and don t think it s useful for me over there, my husband or even for my son, since I didn t realize that it s only for him to collect it if i die, I would be more open to having something for ME while living, I m not worried about my son so much anymore now that I am married to a wonderful man and through his job, I m fully covered on a number of things.Would u mind replying to my email and letting me know if I should stop payments,and if so, do I get penalized, do I pay any fee for canceling it,surprising enough, I can t reach anyone at the Insurance co that will give me any straight answer or honest, easy to understand reply, and I just don t want to pay another month if I don t have to.Thank you so much for all of your input, clarity and dedication to everyone, you are obviously in love with your work,your calling!All my best!
Valeria
Matt,
I really appreciate your article, and find it fascinating that comments are ongoing for years. Some of the comments are very insightful, while other are…
One thing that I didn’t see (though I did skim through a lot, so I might have missed it) is the point that it is not and should not be a one or the other, all or none decision!
Except for the very wealthy, most people could benefit from a combination of a highly overfunded Whole Life Insurance policy, and a term policy to make up for the difference. For example, let’s say a 25 year old determines that he needs $3,000,000 of insurance. He might purchase a $1,000,000 Whole Life with an annual premium of $12,000, but overfund it buy paying $30,000. He would also get a term policy of $2,000,0000, which he might convert partially down the road, after the first Whole Life policy is well seasoned.
On the lower end, a 25 year old might need $1,250,000 coverage. He buys and overfunds a $250,000 whole life, and supplements with $1,000,000 term.
And for all those repeat comments about the “company taking the cash value” or “cash value is not yours”, I just feel compelled to put things straight: A Whole Life policy is not a deposit account, it is a highly liquid asset. The Cash Value represents your current EQUITY in the policy. Very similar to the equity in your home.
If you have a $500,000 home with a $250,000 outstanding mortgage, your EQUITY is $250,000. If you wanted to CONVERT THE EQUITY TO CASH, there are two ways to do that, you could either sell the house, pay off the mortgage, and keep the cash which equals your equity (after paying fees, taxes, etc.)
or;
You could go the bank and ask for a loan secured by the equity in your home. That way you can convert the EQUITY into cash, without having to give up your home. You will pay interest, but generally speaking you will have less fees and taxes. You might find this worthwhile (many Americans do).
SIMILARLY:
The CASH VALUE of a Whole Life policy represents your EQUITY portion of the FUTURE (of unknown date) Death Benefit.
You can convert that EQUITY into cash by borrowing against it (interest cost) or by Cashing in the policy.
However, unlike a house, a Whole Life policy is HIGHLY LIQUID (can be converted to cash in a matter of days, irrespective of market conditions) and has Guaranteed Values (once dividends are paid, they are fully vested and added to the Guaranteed Values, it is only future dividends which are not guaranteed). As such, borrowing against a Whole Life policy is much simpler (can be done without an application, credit report, etc.) Additionally, here again it is not an all or none proposition. One can PARTIALLY surrender a Whole Life policy, or just surrender additions (dividends or client paid Paid-up-additions). Try that with a house, try selling just one room or a few bricks. With a house, unless you decide to borrow, converting the asset into cash is an all or none proposition.
A Whole Life policy is an Asset that has some very unique features, which most people (including most of those who sell it) don’t really understand. That is unfortunate, because once properly understood and used, it is a great tool.
Forgot to mention an often overlooked issue:
A lot of the Buy Term and Invest the Difference information is basing the numbers on a Preferred or Super Preferred life insurance risk. When the life insurance risk is not so preferred the numbers might look very different, as Term is no longer so cheap.
Furthermore, if a person has some mild underwriting issues, companies might often make better offers on permanent insurance than on term insurance, and sometimes will only accept the risk as permanent insurance!
This is a fair explanation, but I have a few disagreements:
1. Even when combined with term life, I do not think that most people should have whole life. Yes, a well-designed policy can be useful in the right situations (for the very wealthy or very high income, for people who have children with special needs, etc.), but that’s not the case for the vast majority of the population.
2. Your comparison to a house is reasonable (though there are differences), but I don’t consider a house to be a good investment either. So in a way that comparison is proving my point.
Matt, please don’t take this personally, but your “disagreements” seem extremely shallow and devoid of sound reasoning.
1. Almost ANYONE can benefit from a well designed overfunded Participating Whole Life policy. Are you saying that the vast majority of the population has no place in their investment portfolio for a guaranteed fixed asset that provides long-bond like returns (coupled with a few other bells and whistles)? I would even argue that single people with no children might benefit from this product in the right amount and the proper structure (not to mention that some policies now have the option to pay for long-term-care). EVERY PERSON that cares for someone or something (be it a spouse, a child, a charity, or anything else) can benefit even more, by virtue of having a guaranteed death benefit. Such a benefit allows the comfort (and better cash flow with lower taxation) of spending down assets, rather than relying solely on returns on assets.
2. My analogy to a house wasn’t intended to compare the merits of an investment. It was simply a way to explain the Cash Value of a policy, in terms that people could understand better. We many times hear the argument about Whole Life Cash value: “It’s my money. Why do I have to borrow against it?” Giving the analogy of a home (or for that matter any asset of value, be it real estate, or stocks, bonds or mutual funds held in an account that allows for margin loans) helps people understand the difference between an asset that has value, to actual cash. It also helps people understand why sometimes it is preferable to borrow against an asset, rather than liquidate the asset.
1. As I mention in the post, the actual “guaranteed return” is minimal. And there are plenty of other ways for people to get bond-like returns without the downsides of whole life insurance (like, for example, bonds).
2. I agree that your analogy was a good one in terms of explaining how the cash value works. I also think it’s a good one in terms of reinforcing the point that in most cases it’s not a good investment.
Matt,
A little open mindedness doesn’t hurt 😉
I know that for years everyone says what a BAD investment Whole Life insurance is. And it is indeed a terrible investment when done wrong, and like anything that is not properly understood, is a bad investment if you don’t know what you are getting into.
As for downsides of Life Insurance (vs. Bonds), can one really consider those without consider the advantages over bonds?
If one were to buy a long dated bond with a yield of 4%, and interest rates go up, one could actually end up with a loss if bond not held to maturity. On the other hand, if one were to OVERFUND a participating Whole Life policy, the CASH VALUE IRR over 20 years would be around 4% (probably slightly above) based on current dividend scales. Yet if long term rates rise, so will the returns in the policy. As long as premiums are paid, the cash value in any given time will NEVER be less than the cash value a year earlier.
Now throw into that some added benefits of the life insurance (if properly structured): Income tax free death benefit, Disability Waiver of Premium, Tax deferred growth, with the option to access the money without taxation, creditor protection in many states.
Just like $1 bill is worth the same as 4 quarters if using it at the grocery, yet they have different features: In a fire the quarters survive, but the dollar bill doesn’t. Same applies if they’re on a table outside and a strong wind blows. If you happen to have a small hole in your pocket, you might lose the quarters, but the dollar bill might stay. And if you have 5 dollar bills in your pocket, that’s insignificant, but you wouldn’t want to keep 20 quarters in your pocket for very long.
Bottom line, everything has it’s set of features, and should be evaluated based on all features. And where I live in Brooklyn, NY, many people will say that buying a home was one of the BEST investments they ever made.
Wow, what a great article, Matt. A couple of nights ago, I was listening to Clark Howard on the radio, and to my dismay, heard him start talking about one of the worst investments for college. He continued, and when he actually said whole life insurance, my heart dropped, because about ten years ago, my wife and I were talked into this “investment” for paying for our kids college.
So, my question is going to be a little different. I will have to dig up the specifics on the policy, because it has been a couple years since I looked at them, but what do you think about this, as someone that is already 9-10 years into the policy?
Does it make sense to keep them at this point, since we will to be lucky to break even, pulling our money out, with the fees and what not?
Thanks Jason! Your question is a good one, and the truth is that it really depends on the specifics of your situation. What are your college savings goals? What does the policy look like now? What is it expected to look like when you need the money? What other funds do you already have in place? I’m not asking you to answer those questions here, just want to give you a sense of the kinds of things I would consider.
If you’d like, I would be happy to talk to you on the phone to see if this is something I could help you figure out. You’re welcome to schedule a time here: https://momanddadmoney.com/consult.
In any case, I wish you the best of luck!
Jason, the difficult years of a Whole Life policy are usually the first 3-5 years. during those years your cash value generally is much less than your premiums. Usually somewhere around year 5 or 6, your cash value grows by more than your annual premium (on a year over year basis), and those growth rates tend to exceed other fixed investments.
So while each situation is different, you probably have already swallowed the bitter elixir. From this point going forward your policy is likely to perform well, compared to other fixed investment or savings vehicles.
Jason, I need to make a couple points in response to Alex’s comments here.
1. Alex hasn’t reviewed your policy, nor does he know anything about your personal goals or situation. Neither do I, which is why I didn’t give any concrete advice in my initial response. All of which is simply to say that any opinion about this policy based on what we know from your comment, whether it’s coming from me, Alex, or anyone else, cannot possibly be informed enough for you to rely on.
2. I have reviewed many policies that directly contradict what Alex is saying here about the cash value increasing by more than the premium payment by year 5-6. Again, that doesn’t mean anything specific about your policy. It’s just to say that I wouldn’t rely on that information when making your decision.
The bottom line is that every situation is different and there is no black and white answer. I would love to provide you with more concrete guidance here, but it would require a more in-depth review of your situation.
Matt, you seem so eager to trash Whole Life, the hell with the facts!
While it is true that I cannot make any recommendation without knowing the specifics of the situation, a forum like this (comments on a blog) is probably not the right place to seek advice or recommendation.
All I was doing was pointing out that while it is highly likely that a policy surrendered in year 9 or 10 (which is what Jason stated) would be surrendered for less than the cost basis (i.e. he wouldn’t break even), that should be taken in context of the way whole life cash values are usually structured.
In my experience it is rare to find a policy for which the cash value growth by year 6 doesn’t exceed the annual premium (except for policies purchased at older ages, or policies of low face amounts, which have inherently higher costs), that is more than likely to hold true by year 9 or 10! Catching onto some words in my statement, while ignoring the facts presented, doesn’t make you more credible. I challenge you to post images of inforce illustrations where cash value growth is less that the annual premium by year 6.
If it was not clear enough from my comment, here is my advice: check the CURRENT YEAR OVER YEAR PERFORMANCE (ask for an inforce illustration). While in retrospect it might not look good, that is due to the costs built into the first few years. Look to see what this policy does going forward!
Whole Life is absolute garbage…and I say that when it pays my bills/keeps me employed (I’m not an agent, but work for a mutual life insurance company). There is no way around it. 99% of people do not need it in any way, shape or form.
Anytime, you have to pay interest on your own “accumulated” money that you’ve contributed to the policy, is beyond ridiculous.
Let me give you a simple, real life lesson here on a 30 year old with excellent health (myself) — I just qualified for the best rating at a life insurance company.
My Premiums:
30 Year Level Term: Death Benefit of $3,000,000 = $2,035 per Year in premiums.
A Whole Life Product for the same death benefit is $2,890 PER MONTH or $33,230 PER YEAR. Ok, so some companies might be marginally cheaper, but I literally just got this quote for Whole Life.
Who in their right mind would EVER do that? There is not a single tax benefit in the world that will justify this.
Invest the difference for 30 years at 7% (and yes, this is very doable and almost too conservative over the long term picking solid mutual funds) and you will have $3.1 Million.
In 30 years, my home will be paid off and I will have no debt. I will not need a death benefit of $3,000,000 when I’m 60 — but guess, what I’ll have MORE than that in my retirement accounts.
PLEASE — DO NOT GET ANYTHING BUT A TERM PRODUCT AND INVEST THE REST.
Hi!
I’m an insurance agent and agree with everything you’ve said.
Here’s another myth I’m sick of hearing…
Well the “buy term and invest the difference” strategy only works if people actually do it. Most people will buy term and pocket the difference, so they’d be better off buying whole life, since it’s somewhat of a forced savings plan.
That’s the gist.
But you could make that same argument for any investment strategy on earth.
ETF’s don’t work because you might not actually add money to them. 401K’s and IRA’s are poor tax favored plans because who will actually invest in them regularly?
Lord, what a bunch of BS.
I didn’t want to spam your comments, but email me if you’re interested in a term vs. whole life calculator I recently published. It basically proves that 99% of the time, you come out ahead if you buy term and invest the difference.
Completely agree. Statistics also show that while people may not invest the difference in premium as they should, they also don’t keep a Whole Life Policy around long enough to “reap the benefits”. That is statistical and insurance companies know this.
Whole Life products as “investments”…what a joke. It’s the payday lender of the middle class.
I’m not sure why people are excited about making 4%. You will make 7, 8, 9% long term in solid stock mutual funds. I wouldn’t be satisfied with a 4% return — why anyone else would be, I’m not sure.
These products are full of fees and line the pockets of the agents. That’s why agents show up wanting to sell you this horse crap.
Your post on why whole life insurance is a bad investment was extremely informative. My father in law is deciding whether to buy a whole life policy because his term life premium is going up and he only has 5 years left until the policy expires. After reading your post and looking closely at the insurance companies offer my wife and I are advising to do something else with their money. Thanks and keep it up!
I’m glad you found it helpful Adrian! Before you make any decision I would make sure to consider whether he has a need for life insurance. If so, then some kind of permanent insurance may be helpful. If he’s looking at it as an investment then you’re likely right that other avenues would be better.
Full Circle, one time I thought whole life insurance was great. Then I cashed it in, bought at least 5 new automobiles, a house, a couple motorcycles and more bullshit. Then I learned how to properly use life insurance as a bank, instead of borrowing money from a bank, I borrow the money from myself and pay myself back what I would have paid banks. I get to collect all the interest I would have paid the banks. I get to grow my money tax free. I get to pass my hard earned money on to my family tax free. The key is understanding Whole life vs creating your own banking system.
Here’s a good, quick breakdown of why this kind of thing doesn’t actually work: http://kahlerfinancial.com/financial-awakenings/insurance/byob-dont-join-this-party.
Matt; Thank you for the thought provoking information you have taken the time to post here. My question: I am 66 and my wife 54. We got a whole life policy several years ago. We wanted insurance that would extend into our 70’s and 80’s (if we are so blessed), because we experienced how end of life costs for elderly parents can add up and be a possible burden to the children. we also want the surviving spouse to be assured of not being cleaned out financially. When I looked at the numbers; Cash value plus death benefit plus a long-term care rider, it seems to be a pretty good return, after all, we know for sure that we will die. I am not aware of term insurance policies for people much past the age of 70 for $200,000 or more. Am I looking in the wrong places or is my think askew?
Good question Steve. The full answer is that I don’t know exactly what options you have and it likely makes sense to talk to a good independent agent. But you are right that it is much harder to find affordable term life insurance as you get older, and in your case some kind of permanent insurance may make sense if you have an insurance need. Just make sure that you are only getting the features you need, and none that you don’t, so that your premium is being used as efficiently as possible. For example, if you are only buying it for the death benefit, do you need the cash value?
Here is my analagy of the whole life deal. I am 53 the whole life minimum quaranty is 4%. if the guaranty says I pay $8,000 a year for 15 years and stop making payments I’ve paid $120,000. if this policy is for $400,000 then I have that policy to leave as a legacy for my 2 children tax free. If the past gains from the last 30 years happen then I would pay $120,000 for $550,000 of legacy that is also at this time tax free. That would be closer to $700,000 to the kids. I am going to price term for 30 years at my age but have a feeling its pricey but probably less than $8,000 per year. Thoughts from a young person?
I am an agent with one of the top companies and have been for 5 years. The “buy term and invest the rest” sounds like a great idea but here’s what I have found. People don’t actually do it. You cannot change human behavior. I try to hold my clients accountable and want them to do the same for me. If a client is a spender, they will never stop being a spender. For those people we design a savings plan that let’s them spend their money guilt free, as long as they hit their monthly savings goal, they can spend what they wish.
Also a comment on the “non-guaranteed” argument. Yes if you do business with a company not named Mass Mutual, Northwestern Mutual, or New York Life, you are likely getting ripped off. But if you work with a reputable company, they have paid dividends every year for 150+ years. So yes, legally speaking, returns are not guaranteed, but every year for 150 years sounds pretty good to me. Just as asset class diversification is important, so is tax and risk diversification, which permanent insurance provides.
Matt, you are also misinformed about how policy loans/cash surrenders work. You can always take out your basis tax-free, fee-free, interest-free. Then, yes, there is an interest rate but often times the dividends can start paying, but you are paying interest TO YOURSELF.
People don’t actually hold onto Permanent Insurance either — Statistics show that. Once they get several years into it and realize what a rip off it is, they pull the plug.
Death is entirely inevitable, yet so many families do nothing to ensure that the financial aspect of death is taken care of. And when this happens, the pain of the loss is made much worse than it should be.
Imagine losing your mother then realizing that she doesn’t have any life insurance. Now imagine that you don’t have the money to pay for a proper burial or cremation. This kind of situation happened far too often…
The best way to ensure that your family doesn’t have to deal with this type of situation is to plan ahead. This typically involved buying a life insurance policy and putting your final wishes in writing.
I have recently purchased a whole life policy. Despite recent worry and analysis that I have made the right move I am still of the belief that it is, although I appreciate your critical review to further my education.
The issue of diversification eludes to a level of risk. However, the history of paid dividends over 50+ years for the companies I reviewed demonstrated extremely low risk, with standard deviation on dividend of 1.5. This is extremely low risk. Of the companies I reviewed the 30 year history of dividend ranged between 5.4% (lowest) to 13.3% (highest) .
The issue of guarantee requires fair analysis of other investments for which there rarely is. Whole life policies have a long history of consistent dividends and because it can be invested in corporation and before personal taxes it seems likely it would outperform perform bonds.
The death benefit and cash value grow over time. To me, the value is not just in the cash value but the death benefit, which unlike in term will always pay out. As a result, estate planning becomes much simpler and offers the ability to liquidate assets… since you’d know the death benefit would take care of any debts owed, mortgages, etc.
You are right, whole life is complicated. But, the reason I preferred whole life over, for example investing in the stock market, is because I have NO IDEA how the stock market works and the level of risk seems significantly higher.
Great Job Matt on a well written article.
Most agents try and sell whole life or Universal life because they make way more money on those products Vs a simple term Policy. I seriously don’t know how they sleep at night knowing what they are doing to families.
Thanks for adding to the sea of confusion. Term insurance may be dirt cheap when you are young, but it is deathly expensive by the time you turn 50 or 60. Term or permanent insurance are just tools for different needs. There isn’t a one size fits all solution to life insurance, and just because a few mis-guided and zealous agents have sold the wrong product doesn’t do justice to a great industry that provides a lot of security to families in their time of need.
I am licensed as an Insurance agent and recently I delivered 3 cheques to a widow. One was from a Term policy, one from a Universal Life Policy and one from a Whole life Policy. All 3 did what they were suppose to do – provide for the family.
I meet prospective clients every single week that wish they had kept their Whole life Insurance, but they let someone talk them out of it many years ago with the theory to buy term and invest the rest. That may work if you actually invest the rest and can guarantee that you will have no need for life insurance past age 55 or 60. If you still have a need for insurance later in life – it will either be too expensive or be impossible to qualify for based on health.
My advice: Load up on Term, especially when you are young and healthy, but make sure it is renewable and convertible. As well, buy some permanent coverage to at least pay for final expenses. When you buy term insurance the premiums are gone forever. Unless you die no one benefits. At least with whole life insurance someone will get back all, and in most cases more, than you ever put in. The most important question to be answered when getting insurance is, how much do you need? Typically, you will need 5 – 10 times your income plus debt coverage, if you have someone financially dependent upon you.
I have the perspective of seeing many Whole life policies from as long as 60 years ago and they have done exactly what they were suppose to do – grow in value – and grow in death benefit. As far as an Estate Planning tool , I have yet to find anything that works as well permanent insurance.
Be careful of this, “when your only tool is a hammer – everything looks like a nail”. There are many tools for many different jobs and life insurance has many tools.
“Unless you die no one benefits.” See this: No One Wears a Bulletproof Vest Hoping to Get Shot.
Many great points and counterpoints. My two points against cash value in general is the monthly cost and the “investment”. Very few people can afford that monthly premium. It is good that you can borrow from the cash value because you will need to at times to make ends meet. Because once you try to make monthly premiums over and over on cash value, you realize the extra $200 to $300 per month that is going out could be in you pocket helping to pay basic living expenses. Then the investment that does have healthy returns. I can look at historical returns for Invesco, American Funds, Fidelity, etc. that go back to the 1960s and 1970s that return an average of 10% + since inception. Why would I pass that up for returns of 5% or lower? Plus, if the policy holder is not careful, their investment can go back to the insurance company. I want my investment to go to me and then my heirs. I strongly oppose cash value as it only benefits a small percentage of the population. The vast majority of the middle class cannot afford it. Once my investments reach a certain amount, I am dropping my term policy because I am now self-insured. Pay as little for insurance(premiums) and get the most coverage (death benefit). If cash value were so good, the investment portion would pop-up in other types of insurance (automotive, disability, etc.) Life insurance is the only type of insurance where it is located and is oversold to so many people that it will not help. Anybody reading the posts in this forum are already doing them selves a service by seeking to understand. Understand that Dave Ramsey and Suze Orman are on the side of the consumers. Base don the tone of my post, you can determine who I sell life insurance for and I am proud to do it. My commission is 1/10 of what a whole life agent makes. Also, we are the only life insurance company that encourages policy holders to drop their policy with us once they have financial independence. Our whole goal is get people out of insurance premiums and direct them to investment vehicles that build wealth. BTID. Buy term and invest the difference.
After reading the entire thread, couldn’t help but add my thoughts. I am a civilian here so no affiliation as an insurance salesman or financial planner in any capacity. I am however, an owner of a WL policy (one year in) which I got through a friend in the business. I admittedly jumped into this without doing the proper due diligence as more of a favor to him. I have had anxiety about this decision since, and am days away from my second annual premium payment and have thus spent a great deal of time researching and thinking about the implications of this asset. I am at a “cut my losses and run crossroads”. Is this a quality asset, or do I cut and run and chalk-up the loss as the cost of a lesson learned in letting others do my independent thinking for me (two implications here are that 1) I do believe that the person who sold me this actually believes in the products and 2) that doesn’t mean that he is right and any person, no matter how financially savvy, who is willing to dedicate the time, can do the research and come up with their own view). I say all of this to admit that I am biased, even if only sub-consciously, as I have tried to think in a balanced manner with regards to this decision. All of that being said, I am currently leaning towards keeping the asset in place and welcome thoughts. My current logic below.
I currently max out all of the “pre-tax” / “tax deferred” options I have available to me. I can comfortably afford the premiums at my current salary and have an emergency fund of roughly 6 months at my current lifestyle. I have no assets but also no debt. I have no kids but do plan on having them.
First thing I would say is that it seems the only way this is ever a good asset is if you are comfortable with holding it for life so let’s assume that is the case.
I am attracted to the asset based on 1) The tax diversification advantages 2) The idea of a death benefit for my family after I pass 3) the physiological trigger of forced savings 4) The “relative” liquidity/ flexibility of being able to access the money 5) The, what I view as, an acceptable rate of return “ROR” vs. the “buy term and invest the rest option” based on the relatively low risks 6) The idea of treating this as a fixed income asset that does not get taxed annually in my overall asset allocation and therefore adjusting my 401K bucket towards more equity and finally 7) The idea of a fixed investment with stable returns in the distribution phase of retirement is important to me.
I have calculated a ~4% average annual ROR if the policy is kept for at least 20 years. This is not an IRR as an IRR gives no credit for the value of the death protection. This assumes the current dividend scale and can be defined as essentially the interest rate that accumulates the premiums, less an estimate of the value of the death protection each year, to the policy’s cash surrender value at the end of the period studied. It attempts to answer the question, “What interest rate would I have to earn on an outside investment of the extra premiums for WL to do as well as investing those extra premiums, in the WL policy?” consumerfed.org is a great resource for this analysis and other literature on this subject.
The ~4% ROR initially feels like an acceptable return given limited principal risk, tax advantages and the current returns on alternative safe investments. I personally feel that the market will be more susceptible to bouts of volatility and higher levels of inter-asset correlation in the future. The idea of a fixed investment with stable returns in the distribution phase of retirement is important to me.
I Identify my risk in two separate buckets:
Principal risk- Which I would characterize as mostly counterparty risk, understanding that some of that principal should be viewed as the “cost” of the death benefit and non-withstanding the liquidity constraints based on the structure of the policy
Return risk- Driven largely by interest rates and the phenomenon of lucrative long-term bonds held by Insurers maturing and being replaced with lower yield bonds
The three nagging issues that cause me to continue to question this asset are
1)The return I am viewing as acceptable is likely overstated given it is based on this year’s dividend interest rate for my policy. Dividend interest rates driving WL dividend formulas have been shrinking given the issues described above when defining return risk
2)The lack of cash flow flexibility is troubling in that the largest assumption driving my analysis is that I am able to continue paying the premiums and keeping my policy current. If I want to take time off for travel (which is a near-term goal) or lose my job before this becomes self-funding, the policy can lapse and I would get only the cash surrender value at what is most likely a loss depending on timing
3)Fees/expenses, are high and not transparent. I am in the process of taking all of my money out of mutual funds and putting it all in low cost index funds for same reason.
There is a lot of good information here, however when I think of what my father-n-law did to himself I have to disagree about whole life insurance. My father-n-law use to sell life insurance in the 1960s and only believed in term and that is all that he has ever had. However, now in his 70s, the only thing he is eligible for is a 3 year term policy and I’m sure that once this expires he will age out and no longer be eligible for coverage. He will not admit the exact amount of his monthly premium, but its over then $150 a month. He has contacted many companies for alternatives, but he is either not eligible, or the cost is too high. I’m not looking for “investment”, I’m looking to protect my family, and I refuse to back myself into the corner that he did. We may loose the house in case we can figure something out.
Sigh, another article with misleading information regarding whole life insurance.
As a holistic financial planner, I sell probably 4-5 whole life policies a year. I am not a “Life Insurance Agent” or salesman, but I do like the product when it fits the clients needs.
Reason #2 says, “Whole Life Returns are not Guaranteed”. This is false. Any Whole Life contract from a quality company will have guaranteed returns. The Non Guaranteed returns are actually closer to the expected returns, since these include didvided payments, which the respectable carriers have been paying out every year, for over a century.
Whole Life allows principal protection guarantees of your money as well. Cash value is not subject to market losses, as it is with stocks and mutual funds, etc. So when the stock market tanks again (because it definitely will), you wont lose a penny.
Back to guaranteed growth…. Whole Life policies are interest rate driven based on the economy, but your “Cash Account” will increase every year, regardless of the market. Compound, tax-free growth. The dividends paid to the policy owners are also not taxable. Dividends are not guaranteed, but take a look at the dividend history for companies like Mass Mutual, Penn Mutual and Guardian. They might as well be guaranteed.
The best part of the cash value? You have access to it at any time, for any reason, without taxes or penalties. This is probably the best benefit of whole life and is what is most attractive to my high net clients who are already maximizing contributions to IRA’s, 401k’s etc. Also, whole life does not carry the same penalties for withdrawals as these other accounts do
Lets also not forget a very important aspect of whole life INSURANCE. It provides guaranteed insurance, for life. Term policies are nice, and serve a purpose, but they eventually end and the cost to continue term as you get older can be way too expensive for most people. Whole Life allows you to lock in a guaranteed premium, that will never increase.
There are also countless riders available on whole life, such as chronic illness, accelerated death benefit, etc, for little to no cost.
It seems a lot of people have a negative perception of whole life because of what they have been told by people who are not experts on the subject, or them or someone they know bought a bad policy, from a bad agent. A properly designed whole life policy (it should always be overfunded), from a good company, will always be a good investment.
Best,
Mike
Hi, Matt
I was sold a whole life insurance policy for my dad back in 2007. He had preexisting conditions so I was told this was the policy for him. I have been paying on this for 9 years now and have paid over the face value of the policy. Do you have any suggestions as to what I should do? Should I have gone a different route as far as a certain policy?
Thanks for reaching out Kendra. To be quite honest this is a complicated question without a simple answer. It depends very much on your father’s need for life insurance, his current health status, and the specifics of this policy. It may very well be that the policy you have is your best option going forward. Or it may be that there’s a better one. But it’s impossible to know without a more thorough evaluation.
If the coverage meets your needs and you’re able to comfortably afford the premiums, I wouldn’t worry about it too much. There probably isn’t a rush to do anything.
BUT if either of those conditions is not true, or if you’d like to make sure you’re optimizing your options, I would suggest speaking to a fee-only advisor who can give you some objective advice. Please feel free to reach out to me directly if you’d like some more guidance.
Hi Matt,
I’m in the process of evaluating a whole life insurance with an Early Critical Illness Advance cover. The reason for doing so is that I’ve come across many cases of colleagues with failing health in my work recently, and was told that there is a 33% that anyone can get cancer. And I fear, I could be in that statistics. So, the insurance is to give me a payout, in the event I can no longer work and earn a salary, so that at least I could still live comfortably.
I have children and already have a term insurance that stops when I’m age 60. I’m 40 this year. The WL insurance I’m looking at requires me to pay a total of $70k in premiums, over just 10 years, and I’ll be covered for $100k sum assured with a booster factor of 3 (ie $300k payout) before the cut off age of 70.
I agree with the argument that buying term and investing the rest is a more sound approach for a simple comparison between WL and TL, but in my case, its the Early Critical illness that is my major concern. Would you say its not worth an investment to buy WL for this?
Good question Eski. I would encourage you to look into long-term disability insurance as a potentially more effective way to provide coverage for the exact risk you’re talking about. In general you’ll get better, more comprehensive coverage from a disability insurance policy that’s specifically designed for this than from a life insurance policy that includes it as a limited add-on.
Hello Matt,
Thanks for your insights and great details into whole life insurance. I have a questions, you did not cover in this article. How about taking whole life insurance of say, 250K for a baby. The premiums are abt $1000/year and after 20-30 yrs there is some good return (contingent on company performance).
Thanks
Prem
Good question Prem. And to be honest my thoughts on whole life for a child are pretty much the same as the rest of this article. I just think that in most cases there are much better ways to invest your money.
18 months ago Fidelity Life Ins. sent a letter saying I have out lived my life insurance policy and they would be sending me a cash payout. I was sent this payout last June (2015, now a year later (2016)they sent a letter OOPS – we over paid, you owe us for the over payment. Is this legal?
Glen
I’m sorry to hear you’re going through this Glen. I can’t say for sure whether what they’re doing is allowed, but I would recommending talking to a good independent agent to help you understand your rights here. That’s not me, but you’re welcome to email me at matt@momanddadmoney.com if you’d like help finding someone.
Awesome article Matt! Couldn’t agree more – unfortunately not enough people know that whole life insurance should only be purchased in very limited circumstances and should not be considered for investment purposes. Thanks for joining the #wholeliferebellion. I created a Term v. Whole Life Insurance comparison calculator so people can crunch the numbers: http://www.insuranceblogbychris.com/term-vs-whole-life-insurance-comparison-calculator/
Nick this was a terrific overview. You didn’t mention the whole life rip-off, i.e., that the Client is paying for 2 things but in the end only gets 1. If the insured dies the death benefit goes to the beneficiary, the cash goes back to the company. Conversely, if the Client takes the cask the contract is terminated and the death benefit is gone. Bad, bad, bad!
That’s a great point. While flexibility can certainly be helpful, these policies are often sold as if they will help you achieve all of your financial goals. And while in the right situations they can be available for multiple needs, they are still a limited resource and can, in the end, typically only be used for one thing (or a couple of things on a small basis).
My husband and I purchased a 20 year $250,000.00 term life insurance policy in 1999. I purchased a $500,000.00 20 year policy a couple of years ago but due to my husbands health he was declined. Our $250,000.00 term policy will expire in 2019 and it does allow us to convert to a whole life policy before it expires. From what I’ve researched it appears my husbands only option is to convert his term life insurance policy to a whole life policy since a health examination is not required. Plus we do not have enough funds to retire at present. Is this his only/best option?
Good question Melanie. First, may I ask why you want more life insurance in the first place? I want to make sure there’s an actual need before pointing you in any particular direction.
There have been enough people screwed over by stock insurance company agents to justify this article. However, before jumping to conclusions about Whole Life, I would recommend everyone research the business structure of a “Mutual Insurance Company” such as MassMutual or Northwest Mutual. These companies are literally owned by the policyholders and have historically paid dividends that equal the premiums of a whole life policy within 1.5 decades. They also typically perform better than the illustrations. It’s not necessarily an “Investment,” but sacrificing higher returns for security in the form of liquid cash and life insurance coverage seems like a wise decision to me.
Thank you for this article; it gives me food for thought on what I should do with my savings. I have a Roth 401k that I just started almost a year ago. Maybe I should work more on adding more savings into that, and also into my public teacher’s STRS pension plan rather than drop a lot of money into whole life insurance…?
Without knowing the specifics of the investment options or fees involved with either of those plans, I would say that generally that would be the right move Nick.
Can you give an example on how you calculated that the returns?
“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.”
I am currently trying to be sold a permanent life insurance policy and I don’t understand how someone can distort numbers so badly if they “guarantee” it. I have good income and they are wanting me to put 2000.00 a month for 30 years until I retire. The numbers look good but I am unsure as to they are distorting numbers.
Good question Ozzie! You can see a similar question and my answer to it here: https://momanddadmoney.com/why-whole-life-insurance-is-a-bad-investment/#comment-262413.
If you have any more questions after reading that over, let me know and I’ll be happy to help!
Several comments……first, I didn’t read all the posts so I apologize if this has already been discussed/addressed………you mentioned loans on a whole life policy is the means by which “tax free” income is distributed and that makes for the equivalent of double taxation, however the first monies coming out of a whole life policy would be your own contributions and therefore no taxation would be in effect as those monies, when contributed, had already been taxed…….the loan process would kick in when the policy detects taxable growth and would switch to loans instead of withdrawals………..also, let me just mention the insidious monster called “sequence of returns” and how it pertains to “returns” in the market……..returns in the market are reported by averages…….once you look at the “real rate of return” of a stock or mutual fund you might find the long term return of a whole life policy much more palatable……….example: what is the average rate of return in this example and real rate of return……..you have a $1,000,000 home and in the first year it goes down by 40%……….your home is worth $600,000…….the very next year your home goes up by 60%……..your home is now worth $960,000…….but what is going to be your reported average rate of return?……….10%, yet you are still under water; the “real rate of return is -4%…….this is a very eye opening expose on how the “market” makes things look…..it is the downs in the market that kill an investments return…….there are no downs in a whole life policy………..I hope this helps in perspective.
Any reputable source will report mutual fund and stock returns as “annualized” figures, which takes the sequence of returns into account. Another term for this is “geometric average”, which again accounts for the order in which returns are received. So while there are some financial “experts” out there touting average returns (cough, Dave Ramsey), for the most part what you’re talking about here is not a factor.
True, but what’s not accounted for is the rolling geometric average. Trailing returns only assume you invest at the beginning of a period and hold to the end. The rolling average (if done correctly) assumes you invest over time…say monthly…like almost everyone does. I remember reading several pieces by Dan Wiener (who is an advocate for index fund investing, and specifically Vanguard) mention this.
Basically, the returns MF companies (even Vanguard, which Weiner analyzed) aren’t the same returns investors see. He showed how a 9% return quickly turns into a 4% (or less) return over time very quickly, even before the miniscule fees V-guard charges.
That’s not to say indexing is inherently bad. But, it is what it is. index fund companies aren’t saints. They’re like everyone else marketing to you. You sort of have to dig for the truth. 🙂
This is part truth and part misleading.
The truth is that it doesn’t account for the return that the individual investor actually gets. It’s also true that individual investors typically get significantly worse returns than the funds they invest in. And it seems that there are two main reasons for that.
The first is that, as you say, no one invests all their money at the beginning of the period and cashes out at the end. Usually you invest some at the beginning and more at various points along the way. For example, someone who contributes part of their monthly paycheck. And since the stock market generally goes up, that means that you will inherently get lower returns than if you had invested all of your money at the beginning, simply because some of your money will not have been invested for the entire ride.
The second reason is that people make mistakes, such as piling money into the stock market right at it’s peak and pulling money out right at the bottom.
So you’re right. Individual investors tend to get worse returns than what the funds report. But…
Neither of those reasons have anything to do with the mutual funds themselves being good or bad. And in any case there’s nothing the mutual funds can do to report things differently.
They can’t prevent people from making bad market timing decisions, though they can (and many of the good ones do) publish educational material to help dissuade that. So that part isn’t their fault.
And the fact that people invest different amounts at different periods of time also isn’t something they could, or should, control. And they certainly can’t report what an individual investor “would have” gotten, since “would have” is completely different for each individual and each situation.
So I would strongly disagree with the assertion that they are being misleading in the way that they report returns. The way it’s reported allows us to compare apples-to-apples (for the most part) across various funds, which is the best we can do. The rest of it is up to chance and our individual behavior.
Finally, it’s somewhat ridiculous to assert that the way mutual fund returns are reported is misleading given that this is a repsonse to how whole life insurance is sold. I’m not sure that you can be much more misleading than most whole life insurance pitches.
I think you and I are talking about 2 different things. You’re referencing a DALBAR study (which may or may not be false, but honestly other studies confirm DALBAR’s findings so…).
Weiner was talking about rolling returns for Vanguard. So, it’s his argument, not mine. And, this is a different issue from what you’re talking about anyway regarding annual returns based on monthy savings. So I’m not sure where you’re going with this or why you think it’s misleading. I believe Weiner got his figures from Vanguard…so…that would mean Vanguard is misleading itself? Doesn’t make sense man.
What mutualf funds (V-guard included) report is trailing returns, which is only useful if you invest a lump sum at the beginning of a period and then cash out at the end of that period.
Unfortunately, what happens is people read those historical returns and say musleading things like…”the market averages 10% annually.”
But to your point about whole life being misleading…maybe you mean the average agent. Insurers publish internal rate of return reports so you can see the IRR before you buy. It’s not that mysterious really.
I’m pretty sure we’re talking about the same thing. You said that “The rolling average (if done correctly) assumes you invest over time…say monthly…like almost everyone does.” That’s a fair point and it’s the first one I address in my reply.
I’m also mentioned a few other points to give some more context to your comment and why I disagree with your conclusion.
Right…
…just to reiterate, this isn’t my argument. It comes from a 20+ year veteran RIA who advises other fee-only advisors on Vanguard’s funds.
You say: “So I would strongly disagree with the assertion that they are being misleading in the way that they report returns. The way it’s reported allows us to compare apples-to-apples (for the most part) across various funds, which is the best we can do. The rest of it is up to chance and our individual behavior.”
Weiner argues otherwise…I think his point is precisely that there IS a better way to show real world returns for investors: rolling returns.
As for the bit about WL returns, I’m not sure what you’re disagreeing with. You tick a box, you get the net IRR. On the flip side of that, every insurer calculates costs 2 or 3 different ways (via cost indices) by default. Not hard or misleading at all.
It might be better if you qualified your negativity a bit more. There are actually several great reasons to buy whole life insurance…
Shoes are great but if the statement is “size six shoes are great” makes the question more difficult to answer. If you were born with size six feet then size six shoes could be excellent for you. If you’re a size 13 – then, maybe not so much. See? The answer is subject to your personal needs/requirements. Same is true with whole life insurance. Next time you’re pondering the subject ask yourself what should a grandfather do if he wants to insure his grandchild has something from him when his children are irresponsible and will most likely either outright steal the grandchild’s inheritance or just blow through it if they could? Or understand that the family has a history of illness and by purchasing the policy at an early stage the baby will be abler to get life permanent insurance. But to do what I ask requires real thought, not someone shooting from the hip.
Great Article Matt Becker.
I wish more people would listen to what you have said here so they don’t get ripped off. You have laid out very effective arguments why it’s such a bad idea for a vast vast majority of people.
I am 34 and someone just sold me 4 policies (50 Whole Life, 50 Whole Life, 100 Whole Life, and 50 Term). The annual total premium is $2600. Everything he said sounded good. I just received the policies this week. Is it a good idea to cancel them? I realize that I may not get a refund for them; I paid for them this week. I am a musician and I have not learned very much about finances. I have a ROTH that is up 11% YTD with Scottrade.
Your help is very much appreciated.
Thanks for reaching out Karleki. Unfortunately I can’t give you any direct advice, both because I don’t know the specifics of your goals and situation and because I don’t know the details of these specific policies. But I would think about it this way.
First, evaluate your need for life insurance. If you do need it, how long do you plan on needing it for? Is it your entire life or is it a temporary time period?
Unless you truly need permanent life insurance, then you’re likely looking at these policies purely as an investment. In most cases it makes sense to max out at least other tax-advantaged accounts first (like your IRA, but also a 401(k) and others). Are you already doing that? You can read more about which accounts to consider here: How to Choose the Right Investment Account.
Third, do you already have your other financial priorities in place? If not, are these policies making it easier or harder to do that?
Finally, IF you decide that these are not the right policies for you, it’s generally better to cancel sooner rather than later in order to minimize the amount of premiums you pay. You should even look at your policy to see whether you’re still within an initial period where you could get all your payments back. Again, I’m not saying that you should cancel, just that if you do want to cancel it’s better to act quickly.
I hope that helps Karleki. Let me know if you have any more questions!
Hi Matt,
How do you feel about Single Premium Index Life? I am 65 years old with no need for life insurance as my grown son will already be well taken care of with my other assets. The ability to care for myself in my retirement outweighs my desire for an additional legacy. this policy is being sold to me more like a long-term care policy where I can use the death benefit, if needed, for nursing home or chronic care. The single premium is $100K with the death benefit to go no lower than $182K. This is money sitting in saving accounts now because I value the feeling of liquidity. I may, or may not, need part of this money during my retirement. This policy is being presented to me by an insurance salesman who presented himself in a seminar as an expert in Social Security to target his audience. Thanks.
Thanks for reaching out Char. To be honest I don’t know much about single premium index life insurance, but there are a few big warning signs here.
The first is that it’s being presented to you by a guy who invited you to a seminar. That’s one of the oldest sales tricks in the book, and a very popular one with both insurance and investment salespeople. The product itself very well may be fine, but I would be wary of anyone who uses that tactic to sell you something.
The second is that I’ve heard enough horror stories about indexed life insurance in general to be skeptical. It’s not that it can’t work, it’s that there are plenty of examples of it underperforming, having a catch that wasn’t made clear up front, and other instances where it just doesn’t work the way it was sold to work. Any time something is sold as being able to pay for any financial goal no matter the market conditions, it’s usually too good to be true.
I would suggest reaching out to a fee-only financial planner who can help you evaluate ALL of your options, not just push a single product. Garrett Planning Network is great if you’re looking for someone to help on a limited project-type basis, and NAPFA is another good resource to look into.
Good luck Char!
We were sold a whole life policy from Mass Mutual for my husband, but we also have term insurance on both of us. We are on a 10 year track to pay off the policy and have three years left. Is it still a “bad investment” once the policy is paid off? Should we be expecting those 0.74% yearly returns for a fully paid-off policy? Or does that apply only if one is paying premiums on it for the next 30+ years? Whole life insurance appealed to me because I am extremely squeamish about the stock market and don’t want to pay a financial planner on a regular basis. I’d rather have low (but not 0.74%), steady returns than high risk/high reward investments. Did we still make a mistake by buying whole life?
Good question Pixley. Evaluating a policy that’s been in place for 7 years, as it sounds like yours has, is very different from evaluating a new policy. The key is to ignore everything that’s happened in the past and evaluate it only based on how you expect it to perform going forward. I would suggest getting an in-force illustration and running the numbers for yourself based on both the guarantees and projections. Every policy is different, especially those that have been in place for a while, so I really can’t say what you should expect.
If you’d like some help doing the analysis, feel free to reach out any time. My email address is matt@momanddadmoney.com
Great article! We have a term insurance and our agent is trying to get us to convert some for whole life as an investment and becoming your own bank sales pitch. I’m a bit skeptical that this is good way to invest our money. Our gross income is @140k a year. Any suggestions if we should stay away?
I can’t give you any specific advice without knowing more about your situation, but I think you’re right to be skeptical. The first question I would ask is whether you’ve already maxed out all other tax-advantaged accounts available to you. If not, that’s usually a good place to start.
And if you’d ever like a more detailed evaluation, feel free to check out my pay-what-you-can Jump Start Session.
So it’d be best for us to max out the other tax-advantaged accounts before considering whole life? I brought this up when we met last and he said it is a waste to do anything over what your company matches in your 401k and that whole life is better than what they won’t match.
There’s no one right answer all of the time, but I generally believe that’s the best route. Here’s an article that walks through this question in more depth: How to Choose the Right Investment Account.
Hi Matt – my 3 kids (now all in their 20’s) had whole life policies opened for them by Grandpa 20 years ago. He has been paying a fixed annual payment of $240, but it’s now up to me (the kids are just starting out and don’t have a cent to spare). My first thought is to have them cancel and take the cash value (~7k each), but in looking at the policies (for the first time) it looks like at this point they are getting a decent cash value return – each of the last 3 years it’s been about 4.2% PLUS the $240. AND the dividend the last few years has been almost as much as the annual payment – but has been buying more insurance (that they don’t need). Is it possible that if you suffer through the first 20 years, it then becomes a good investment? especially if I redirect the dividends to the cash value or a premium reduction? Great article by the way.
Thanks Brian! And yes, after a number of years these policies can start to produce a much better return. That doesn’t necessarily meant that keeping the policies is the right decision for your specific goals, but it’s an option I would consider much more strongly at this point.
Actually, there is one case which I use which is beneficial for whole life. As you get older, if you set up a Charitable Remainder Trust along with an Irrevocable Life Insurance Trust for your children, it is a win-win. You get the income from the trust, the charity/charities gets the benefit of the assets upon your death, and the ILIT (Irrevocable Life Insurance Trust) pays your kids while removing these assets from your estate. I think this particular situation is a win for all. Early in life though, I would definitely not do this and choose a Level Term Policy instead.
MATT,
I have a Dividend Option Term Rider that will expire soon. I am 57 years old. New York life wrote to me stating I can change over to whole life insurance without having to answer health questions or take a physical exam. What are the advantages or disadvantages of this for someone of my age? I currently have a 401K. Would my money be better invested in that or elsewhere? Thanks.
Good questions. The honest answer is that the only way to know what’s best is to do a review of your personal goals, the policy you have now, the whole life policy you would be changing it to, and the other options available to you. I would highly recommend seeking out a fee-only financial planner who can help you with this, and I would start by looking at the Garrett Planning Network. Their advisors all offer hourly services that would be perfect for this kind of project. NAPFA is another great network of fee-only planners.
There are really two types of permanent policies sold these days. The traditional whole life policies that were “the” original permanent policies and somewhat newer universal life policies. My guess is that most of the permanent policies sold today are universal life policies and not really whole life.
This shift to universal life by insurance companies has made premiums cheaper but removed many of the guarantees that came with traditional whole life insurance like guaranteed face amounts, guaranteed premiums and guaranteed cash values. The result is that there are a lot of underfunded universal life insurance policies out there which aren’t really permanent policies anymore since they can’t support themselves and will lapse instead of paying out.
The best thing to compare permanent life insurance policy to is to another similar type permanent life insurance policy. And you don’t want to focus on the interest rate specifically but on the actual values in each policy that are “guaranteed” – not projected. All things being equal, this tells you which permanent policy is less expensive and provides a higher net interest rate instead.
It doesn’t really make any sense to me to compare permanent life insurance to another different type of financial instrument like a CD or investment either because those products don’t provide a higher death benefit so there is no cost of insurance. It’s not like those other products don’t factor in overhead like salaries, bonuses, buildings etc. People still get paid to sell those products too even it’s not directly tied to the sale.
While I am in agreement with you that people need more life insurance and the best way to provide for that need is with term insurance, framing it as an either term or either permanent might not be the best strategy. Instead a combination of the two with a little whole life and a bunch of term life might make more sense.
That’s because what ends up happening is that a lot of people get talked out of their permanent insurance and then outlive the term insurance and the insurance companies just keep everyone’s money.
And that’s what they want.
I agree that life insurance is very different from other savings vehicles like CDs and retirement accounts. In an ideal world, there would be no comparison and this article wouldn’t have to exist.
But the reality is that insurance agents compare whole life to those other savings vehicles all of the time, often in a biased way. So unfortunately this article does need to exist simply to give people the opportunity to come to a more objective understanding of how these things compare.
Also, outliving your term insurance isn’t inherently an issue. Assuming you plan well, you won’t have the need for life insurance at all after a while. The fact that it didn’t pay out (you didn’t die) AND you saved a ton of money along the way is a good thing.
I am a fairly wealthy Canadian professional with a corporation. I have indeed maxed out all my tax-deferred savings options. I am nearing 50 years old. I only have one child. By the time I retire I will probably have more money than I could use , but my daughter will probably already inherit more money than she will ever need when I pass away. Do I bother with all of this complicated permanent insurance stuff, or just forget it and try to spend as much as I can ?!! Your article makes me want to forget the whole thing is I am not usually comfortable investing in things I don’t understand very well especially when everyone seems to be pushing it due to high commissions. However I seem to be in that 1% group you say would actually benefit from this. What do you think?
Well, first of all, I know nothing about how things work in Canada so I’m definitely not qualified to advise you on this. Given the same situation in the US though, I would say that it’s something you could consider. I would just make sure that you work with a fee-only financial planner who specializes in this kind of thing, can evaluate all of your options in the context of your specific goals, and, if this ends up being a good option, can help you find a policy specifically structured to minimize costs and maximize growth. That’s really the only way I would consider it.
There is a simple fact that really throws a wrench into these objections.
The IRS regulation on how much can be put in over 7 year period to not cause a whole life policy to be considered a Modified Endowment Contract. Additionally, many long standing highly rated institutions will limit the amount of OPP that can be dumped into the policy over a given period. Why is that? Because people will use whole life in low interest environments with the intention of withdrawing in the event of a market change.
A good agent will figure out how much insurance is needed, and if a whole life policy would make sense without causing the policy to MEC within the constraint of one’s human life value. As for surrenders and loans against the policy, good agents discuss how to structure these options for supplemental retirement income to maintain a reasonable death benefit given a retirement age. There are institution(s) that have always paid a dividend and have been top rated every year.
That being said Whole Life is the not cure all for everyone. That’s why different products exist.
Also I am not talking about VUL which is not the same as traditional Whole Life-where the risk is assumed by the company in the general fund.
As a financial planner I find this article very misleading. Whole life insurance can be an excellent way for someone to save for the long term. If you earn too much for a Roth IRA especially (180K plus for a household roughly) then whole life insurance is literally the only place to get tax free savings on growth (tax free municipal bonds also but these have a lot of risk especially with interest rates going up). A properly designed whole life insurance policy with a good company like a New York Life, Mass Mutual, Northwestern etc which have always paid dividends since the mid 1800s can easily earn NET of fees and taxes 4-5% over a 25-30 year period. Which means in a taxable brokerage account for example or a bank account you would have to GROSS 6% or so to match this over that same period every year on average? On a virtually guaranteed basis this is tough to do. This doesn’t even speak to the point that you have a tax free permanent death benefit. When a client’s 20 year term runs up they almost always still want and need some life insurance, and what if they aren’t insurable anymore? Getting some whole life when young and healthy, savings/cash value aside, assures them they’ll always have coverage which can someday go to kids, grandkids etc which is a nice option. Whatever cash you pull out reduces the death benefit dollar for dollar, but if set up properly there will always be more than enough death benefit even after most of cash is taken out tax free in retirement, when the stock market is down (this is especially when you appreciate having a non correlated asset like whole life for when the market crashes and you can tap into your whole life cash so you don’t have to touch your investments in that downturn OR take advantage of the opportunity and but stocks when things are down with cars value). Interest does accrue on policy loan which is why the tax is cash free and the loop hole exists. But often the dividend more than offsets the policy loan interest which doesn’t have to be repaid and just comes off of the death benefit which is often just a bonus anyways. A client should make sure they have enough coverage of course which is why people often get a large term life insurance which is “cheap” in addition to a smaller whole life which is a dual savings, dual coverage to be in place when the term expires.
When you say “If you earn too much for a Roth IRA especially (180K plus for a household roughly) then whole life insurance is literally the only place to get tax free savings on growth”, I assume you mean other than a 401(k), health savings account, Backdoor Roth IRA, 529 savings plan, or self-employed retirement accounts. Otherwise that’s a pretty misleading/misinformed comment.
Beyond that, I do agree that whole life insurance can be useful in certain situations when structured properly. But those situations are few and far between and they require the help of someone who both knows the ins and outs of these policies AND is willing to put the client’s interests over their own financial interests (i.e. minimizing commissions and other costs on the policy). That kind of person is also difficult to find.
We could argue over some of the other points you’re making here, but they’ve all already been discussed in both the article and previous comments.
Initial article doesn’t mention Dividends! My Northwesteren HY-BRID policy is for by yearly dividends after year #8. And the proceeds go to my benefactor, not the tax people. I can barrow against it and pay myself at the same time.
Dividends are part of the conversation around returns. So you’re correct that they’re not explicitly mentioned, and I probably should have done that, but they are implicitly part of the discussion because they’re the main source of returns.
As for the idea that you can borrow against it and pay yourself at the same time, I would read this article: How Life Insurance Loans Really Work And Why It’s Problematic To “Bank On Yourself”.
Great post. Thank you for your time in helping me learn about this.
It’s really disappointing seeing articles like this with so much bad information.
1. Whole Life Insurance is not for everyone. It is a great investment for the RIGHT PROSPECT.
2. Returns are 100% guaranteed.
3. Whole Life is liquid, however it is best to hold off on withdrawing money until the policy has been in force for about 5-7 years (depending on age & rating).
Matt, please feel free to email me. I’d be happy to have an intelligent discussion with you.
Once you write the check, it’s insurance company money. After some time, you may have the right,to borrow some money from them. They decide how much insurance they will pay and how much you can borrow. Let’s take a look at what they have named a universal policy. Let’s say you want to get the savings started right out the door. So you write them a check for $5000. Next month you have an emergency an ,you kneed $25.0/0. Too bad! In a few years, you’ll have a few dollars in cash value. First year or two – none! Now let’s say they have have a guaranteed return of 4%. N ow if you actually have a “cash value” of some kind, don’t you think there would be something there? 4% of WHAT = $0 ??? It’s all insurance company money – they said so to the US government in 1985.
Fair article and thanks for posting.
I would point out below considerations:
It is wise to note that as a business owner or individual that the cash values of WLI can serve as collateral (via assignment) when otherwise collateral may not be available. This can help greatly with loan rates that may be needed in the future for a variety of reasons. Banks realize they are protected against insolvency, liens, and lawsuits (another benefit of WLI) ( yes trusts can do this but why pay 8-15k in legal fees to structure them).
In states like NY the guarantees up to 500K offer a safety net similar to FDIC coverage.
Most of the time people selling against whole life state ” the guaranteed portions never materialize so assume no dividends are paid and let’s assumes you’ll get a 9 percent return in a mutual fund had you invested the difference”. This reasoning is total BS , all major mutuals have paid dividends over the last 150 + years and if you are in a mutual fund getting a higher return than 6 percent it is incredibly high risk and unrealistic long term. Also whole life tends to do much better in market downturns. they also make their money on forfeited policies, loans and pool payouts so their returns are not “totally” tied to the market performance.
Also, locking up guaranteed inheritance for next of kin early allows you to enjoy retirement and spend your savings rather than worrying . What if there is a market downturn during your death and most of your wealth is tied to the predictably volatile market?
All of this being said; putting large amounts of money into WL policies is foolish unless you have maxed out other strategies. It does make sense however to buy a policy for 1.5-3 times your salary though in place of any government or callable muni bond funds in your investment strategy – other than retirement.
The problem a lot of people run into is that they sink all of their money into an over the top whole life policy and use that as their sole investment property which is insane. HOWEVER, I thoroughly believe that whole life insurance is a powerful tool when it comes to funding a comfortable retirement, because whole life’s cash value helps serve as a way to hedge the down markets as a non-correlated asset.
In other words, if you put a dollar into the market, and then the market drops resulting in a panic and you pull out what you put in, you’re more than likely pulling out .65 cents as opposed to the dollar. You’ve lost money, because you pulled out in a low market. However, if you have 3 to 4 years worth of living expenses in a non-correlated asset (I.E. Whole Life) you can use that as an effective way to bridge the gap until the market comes back up again. Sure it may cost a little more, but in the end you’re making a lot more money, since you’re selling your dollar for a dollar or more, as opposed to selling it for .65 cents.
I agree with this general premise, but there are many other conservative, non-correlated assets that don’t cost anywhere near as much and don’t come with the other downsides. Things like bonds, savings accounts, and CDs.
Please explain how a whole life policy can expose one to both negative returns and tax consequences if cashed out ?
Sure thing David. If you surrender your policy before the cash value has caught up to the premiums, which can take a while, you will have received a negative return. If you surrender your policy after the cash value has surpassed the premiums, the earnings can be taxed.
Hi Matt, Im, 41yrs old and have 8 yrs old daughter, My friend told me to get life insurance so that if something happen to me my daughter will get something and now I have schedule to AAA life Ins. next week. I’m not sure what to do. Can you please give me an advice coz I’m confuse now since I read a lot of things in this article. Thank you so much and have a wonderful day.
Life insurance is a great form of protection, but in most cases what you want to get is called term insurance. I can’t say for sure that that’s the right decision for your situation, but I will say that it’s the right way to go for most of the people I work with.
If you’d like to learn more, I have a 4-part series on life insurance that you can begin here: How to Know When You Need Life Insurance.
At the end, you mention, “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.”
I’m fortunate enough to be in this category. Can you expand on why this can be a good financial instrument in this case?
Thanks for taking the time to share,
Dylan
Sure thing Dylan. A full explanation would require it’s own blog post, which I should do at some point, but here’s the quick version:
Hi Matt,
I have a few whole life policies. I was older when I really started to save and have the ability to pay into these accounts now (one I paid $95,000 right at start) and started late on a 401K. I max out my 401K contributions every year (I’m in the 50+ catch up department) so I believe the thinking was that these policies were the best option given my late start. Is that true? It seems your article is geared toward the young investor.
Steve
I wish I could give you direct feedback but it’s really impossible to say Steve. It depends on your specific situation, your goals, and also the state of the policies as they exist now. Evaluating an in-force policy is different than evaluating a yet-to-be-purchased policy, and even a bad policy can perform reasonably well going forward once it’s been in place for a number of years. If you’d like an objective analysis, I would suggest reaching out to a fee-only financial planner. Given that you’re closer to retirement than my typical client, I would try to find one through NAPFA or Garrett Planning Network.
I am looking into different investment options to start a retirement plan. What i have learned thus far, is that the majority of people seem to be looking at the total amount of the investment at the time of retirement. One of my primary concerns is the amount of taxation incurred once the funds start to be distributed. Deferred taxed 401K does not seem to be a viable option when you consider the taxation in say 30 years (even with the employer match) VS post-tax investments at the current tax rate. A Roth IRA seems to be a better option. I recently spoke to an advisor who recommended Whole Life as an investment option due to the non-taxable nature of the investment – i am currently researching how this may work. To your knowledge, has anyone performed a apples to apples comparison of the differing investment strategies to include estimated taxation at the time of disbursement?
That’s a good question Steven, and yes, you can see a review right here: Traditional vs. Roth IRA: The Unconventional Wisdom.
The upshot is that the taxation of a 401(k)/Traditional IRA down the line is often beneficial to being taxed up front. Certainly not always, but often. And in any case, I would challenge you to find a financial planner who does not make money off the sale of whole life insurance who would recommend it as an investment tool before you have maxed out your dedicated retirement accounts.
I have a AARP New York life policy . I began this policy in 2000 term life. My son-in law was working in insurance and told me whole life was better. I didn’t listen for about 5 years more . I then told them I wanted to borrow a certain amount they told me I hadn’t put enough in the policy as I had just changed to whole life a few months ago.they had also told me I couldn’t borrow on the term life anyway ! So I lost over ten years on permenent life
And the policy went up every five years just like this whole life policy . I ‘m beginning to think this AARP insurance is some kind of rip off
I’m sorry to hear you’ve had such a frustrating experience with your policy Jeanette. If I’m understanding correctly, it sounds like you originally took out a term life insurance policy before switching to a whole life insurance policy a few years later, and since then you’ve seen the value of your whole life insurance policy increase. Is that correct?
One of the keys here, as I understand it, is recognizing the difference between term life insurance and whole life insurance. Term life insurance is pure protection. There is no savings aspect to it, so it will not increase in value. For that reason it is much cheaper, but you do not have the ability to borrow against it or profit from it.
Whole life insurance does have a savings component that should increase in value over time. That can be helpful in some situations, but it’s also often not as good as it seems for all the reasons outlined in this post.
For most people, term life insurance is all you’ll ever need. Rather than paying the higher whole life premiums, you’ll be better off paying the much smaller term life premiums and saving the difference. That will ensure that you’re protected when you need it and that you accumulate savings that can be used for any purpose down the line.
I wish I did my research 6 years ago before getting a $2 Million Dollar NYLIFE Whole Life policy. I was paying $1,000/month into it and 2 years ago lowered it to a 1.5M policy and was paying $500/month. In total my Cost Basis is $55K and my Cash Value is just $24k. A LOSS of over $30K! **CRINGE** And there is nothing I can do about it so I’m going to cash out and put towards my existing index funds. This $h!t should be ILLEGAL! My research shows that the insurance agent ate up 90% of my monthly premiums for the first couple years. Family/friends referred him for this ‘Investment’. He ate up all their premiums as well even though their policies were lower than mine. He passed away last year at the age of 60 due to a heart attack. Karma?
On another note, why are other sites saying that people in my situation should do a 1035 Exchange? My Cost Basis is Higher than the Surrender Value. I pay no tax if I withdraw. Isn’t a 1035 Exchange only beneficial if my Surrender Value was Higher than my Cost Basis?
I’m sorry to hear that you had such a negative experience Chris. I have to admit that 1035 exchanges aren’t something I’m well versed in, but I did find this article that explains how it could be advantageous, even when the cash value is less than your basis: Harvesting Tax Losses With 1035 Exchanges.
If this is something you’d like to look into, it would be worth consulting with a fee-only financial planner with an insurance expertise, since they wouldn’t have a financial incentive to sell you on an insurance policy and would therefore be more likely to recommend it only if it’s truly the best path for you.
Okay- so I fell for it. Thirteen years ago, I signed up for a whole life plan and have paid $96 a month on it since.
Is there any way out of this that would make more financial sense? I think I checked on it five years ago and it’s cash value as an asset was only $800! I realize it was a bad decision, but what is the best way out of it?
Thanks,
Wanda
Thanks for reaching out Wanda. The answer really depends on the specifics of your policy, your personal goals, and your overall financial situation. To be completely honest, if you’re already 13 years in and continuing to pay the premiums isn’t too much of a burden, keeping the policy may actually be the best choice going forward. But the only way to know for sure is by doing a detailed review. That is something I could do for you, and if you’re interested you can email me at matt@momanddadmoney.com to get the conversation started.
I see what you mean, but it also varies from insurer to insurer. From a purely investment standpoint whole life doesn’t make any sense. Someone’s insurance needs also differ. I’ve been with All state and NYL. With each there were major differences with not just price, but how the cash value accrual and withdrawing worked. I ultimately stuck with NYL as the rate of return had the biggest impact on premium payments. It reached a point where the cash value being added out-weighed the yearly premium. I haven’t had to pay for insurance for a few years but am still insured. My reason for going about it this way is because I don’t want to pay for it for the rest of my life. Plus the death benefit increases over time and the premiums stay the same. I’m running into people outliving the retirement benefits they got at work. You need to think for the future, but not just from one perspective. Are you interested in a rate of return? Than go for investment accounts. If you want something you eventually don’t have to keep paying for, whole life can be a great option but REMEMBER! Not all companies are the same and avoid universal indexed whole life. Those have increasing premiums. I know Dave Ramsey wants us to buy term and invest the difference, but you’re talking about renewing even some of the longest terms available 2 – 3 times before you’re of retirement age resulting in massive premiums to stay insured before you can dip into your investment accounts, unless you want to deal with early withdrawal penalties and huge surrender charges
There’s a lot going on here, but I’ll say a few things:
1. You’re absolutely right that these policies vary from company to company. Some policies are much better than others.
2. If your goal is to grow your retirement savings, you will almost always be better off with other vehicles. Focusing only on the fact that you may one day be able to stop paying premiums ignores a number of other factors, many of which are addressed in the post, that put these policies at a disadvantage compared to other options.
3. If you’re executing the rest of your financial plan correctly, you shouldn’t have the need for life insurance once your children are independent and you’ve accumulated savings elsewhere to cover most or all of your financial needs.
This article is 100% honest and correct.
Can someone explain to me as to why buying a whole life policy at a young age and treating it like a term life policy is so negative?
1. What I mean by that is why not buy a whole life policy carry the policy for 20/30 years, just as you would a term life. Then once you have paid down all debt, built wealth, and self funded funeral expenses you surrender your policy. (Making sure my policy has no surrrender fees past year 30) Walking away with more Money than you paid in premiums. To me this also gives me options once I hit that 30 year mark to possibly keep the money in the whole life policy to continue to increase at a conservative and somewhat safe rate.
2.Another question is that is it accurate to say that the money that is in the whole life policy (through a large mutual insurance company) is less susceptible to market swings than buying term and investing the rest in the market.
3.Is the whole idea of buying term and investing the rest that one would invest the monthly difference between the two policies and make (in monthly interest) the cost of their monthly term life?
4. If the monthly premium is within your budget and and individual has saved money into other forms of retirement savings. Then why not get the benefit of having the safety net that the whole life insurance gives you then Surrendering that policy when you no longer need it and receiving (what I believe to be tax free) money for having that safety net in place
Sure. There are a few reasons Nick.
First, whole life is a lot more expensive than term life. Often 8-12 times more for the same amount of coverage.
Second, that premium difference is typically better off being invested elsewhere, especially if you have access to tax-advantaged accounts like 401(k)s, HSAs, and IRAs available to you.
Third, yes the cash value of your whole life insurance is less susceptible to swings than the stock market. But it comes with far less upside AND you do not have to invest 100% of your money in the stock market. A smart asset allocation allows you to balance the upside of the stock market with the relatively safety of the bond market without all the negatives of a whole life insurance policy.
Fourth, “buy term and invest the difference” simply means that you would buy term life insurance and invest the premium difference between term life and whole life elsewhere. There is no promise or guarantee of return, though there are some simple, evidence-based ways to increase your odds of getting positive returns.
Fifth, if you have maxed out all your tax-advantaged investment accounts, you are on track for all your other financial goals, you are able to enjoy a lifestyle that makes you happy, and you still have money leftover, then yes, some kind of permanent life insurance policy could possibly make sense. But it would need to be a policy that was specially designed to minimize fees and maximize growth, and you need to work with a certain kind of agent in order to have that done.
Maybe this was a good idea back in the day. I personally think term insurance is not a good investment for anyone. I am not sold on the whole life insurance thing, but there are other types of life insurance that will give you both coverage and money growth at the same time.
I agree that term insurance is not a good investment. But it’s not meant to be an investment. It’s meant to provide financial protection for your family and it does that very well.
Certain financial tools, like insurance, are meant to protect you from catastrophe. Other financial tools, like mutual funds and retirement accounts, are meant to help you grow your wealth. It’s generally a good idea not to mix the two.
I’ve just retired. One of our “advisors” (fiduciary?)is recommending Whole live, my other says way too expensive! I thought W.L insurance protected our children. Won’t a trust fund provide protection from any catastrophic… ie early hospice care etc.?
Thanks for reaching out Bob. There’s a lot that goes into this decision with the position that you’re in, and the right choice really depends on your personal financial situation and what you’re trying to achieve. I would lean towards trusting the advice of an advisor who doesn’t get paid to sell whole life, since that advice is likely to be more objective. It sounds like you’re already working with a couple of advisors, but if you’d like another opinion I would search NAPFA and/or Garrett Planning Network to find a fee-only financial planner in your area.
Thank you Matt for providing information and exposing this scam. Any suggestions you can offer me to lessen the blow of this surrender?
You’re welcome Helen. If you have already surrendered the policy, the best thing you can do is simply make a good decision with the money you get back. If you are still considering whether or not you should surrender the policy, you need to ignore what the policy has done for you (or not done) in the past and focus only on what it should do going forward and compare that to the other options available to you. That’s something I can help you with if you’d like, and you can email me at matt@momanddadmoney.com if you want to learn more about that.
To the people who are offended by this article..
Obviously whole life policies are great for certain groups.
However there is an abundance of insurance agents, NOT financial advisors, who recommend whole life policies to everyone.
I don’t care about the ‘cash value’ and investing aspect of whole life policies – it’s far beyond my scope of financial understanding. I’m interested in Whole Life because I understand that my son is the newest generation in my low-income lineage.
I feel like the concept that I could guarantee him a certain amount of money when I die – whether it’s at 30 or 80 – is a good investment because I; don’t understand investing, don’t have a desirable high-wage career, and I can’t guarantee I’ll ever be able to afford a house (and the wealth growth people hope home ownership will have).
So, please, honestly, and politely, correct me if I’m wrong here but I feel that as a currently low income family, a whole life insurance policy MIGHT be the only ‘inheritance’ my son may ever get. If my aspirations for a better life fail, at least he’d have my insurance policy.
This is a really good question Nicole and I have to be honest that I haven’t spent much time evaluating these kinds of policies for this type of situation. It is possible that you could get a specially designed policy that minimized fees and maximized the benefit for a given level of premium.
With that said, I honestly think that the best thing you can do for your son is work as hard as you can to put the money you do make to work building a solid financial foundation for yourself and, when he’s old enough, involve him in the process so that he can learn real world money lessons at a young age and be more prepared to deal with it when he’s on his own.
I imagine that any level of whole life insurance would require a significant percentage of your income just to pay the premiums, and while your intent is obviously incredibly good I hate to think about the struggle that could cause along the way. Even putting that premium into a savings account instead would put you in a much stronger financial position today, giving you more room to weather the ups and downs and provide a more stable life for both you and your son. Because remember that in order for your whole life insurance to last as long as you live, you need to be able to continue paying the premiums no matter what. If a temporary setback makes that impossible, you could be left without savings and without a policy to pass on, whereas money in the bank would help you get through it. I honestly think that having that savings, particularly when your income is low, is much more valuable than having a whole life insurance policy.
Is seems like your entire argument against wholelife insurance is based on the idea that everyone purchases wholelife insurance as an investment tool. Thats not the sole purpose of whole life insurance is it?
So what happens at 65 or so after the term policy ends? It will renew but at what rate? What if the payout isnt enough to cover funeral costs and any remaining debt? The average American can barely retire and be comfortable let alone have enough money stashed away in a bank or in investments to help with any costs or debts after he/she has passed away. Term life is great for those who have had good careers most of their life and have a nice savings and investments to cash in on in the later stages of life. Unfortunately, that is not the average American. You only presented one side of the coin.
My argument is based on the fact that whole life insurance is often sold as an investment, and therefore many people buy it as an investment. I am well aware that there are other reasons people buy it, and those are explicitly acknowledged in the article. The rest of your questions have already been addressed in both the article and other comments.
I have to agree with Bilal. While this article is very insightful for a very specific audience (young workers), it does not fully take into consideration the needs of older retirees. I had term life for 35+ years; as I approached 70, it got ridiculously expensive. It wound up being just under $1000 per quarter, which I could obviously not afford. I had to cancel the policy, with nothing to show for all of the years of payments. Now I have no life insurance, although I am in exceptional health. Whole life offers me a good way to have a $10,000 policy, which will cover funeral expenses so my kids won’t have to worry with that. I think it is a good deal for my circumstance, and suspect it is for many other older people, as these policies are generally available with no medical questions OR exam.
I hear what you’re saying Bonnie, and there are certain situations in which I think that could be helpful. But in general I would rather see people put those premium payments in general savings/investment accounts so that it’s available if the need arises during life AND it can be used for funeral expenses at death.
Okay so I have been selling insurance for a little bit and I know certain followers of certain groups dislike and recommend not using whole life. This is fine. My job isn’t to push you to buy something that doesn’t suit you.
however. I disagree with the majority of these reasons. Term life is more expensive in the long run especially for younger consumers such as college to young adults. this is because this demographic is less likely to die and therefor are pouring money into something that they most likely won’t use.
That said, using only term life gives you the opportunity to have more free income which if used to invest or save does result in term looking like a more attractive option.
Whole life projection guarantees depend on the company you buy through. Some companies can and do guarantee a cash value and non-guaranteed figures. My life policy guarantees over a 5% return with up to a 20 % return.
The issue of liquidity: Personally having a life policy I can liquidate doesn’t appeal to me because that means I probably will liquidate it at some point and probably for something stupid, however, again company dependent, after 2 years the cash value of my policy becomes so that I can use it to pay premiums, cash it out or borrow against it.
I think that “Whole Life” isn’t a bad investment as many claim, but rather is a situation specific tool and if it is going to be used that way then you need to go with a company that will make sure your worries are addressed.
There’s nothing out there today that is actually guaranteeing a 5% return. They may state that, but when you run the numbers it won’t be anywhere near that.
Whole life is insurance not an investment. You buy it so the day you pass on your family will have money to ease their grieving by giving them time off, financial security, and most importantly for whole life insurance to pay the cost of your funeral, etc. It can mean a lot to people to have a nice funeral for their loved one as a proper send off. I view whole life as a product, like my house, which I also don’t view as an investment.
That’s a healthy viewpoint and I wish more agents shared it. However, I still don’t believe that it’s a helpful product for most people. There are many ways that those premiums could be put to use that would provide the flexibility to use the money for a funeral, etc., or to use it for other needs along the way, all without the rigidness of having to continue paying the premiums or else see the entire benefit disappear.
So our financial adviser is telling us we should have whole life insurance because we can use the cash amount, tax free. We have been contributing to Roth IRAs, but will now not be able to due to our AGI. We could contribute to IRAs, but we’ll be in a higher tax bracket. We’ve been maxing out our 401k accounts, and have investments in the stock market. What other options might we have for retirement?
Each type of life insurance product has its advantages and disadvantages. You can’t say term life is the best, whole life is the best or universal life is the best. It depends on what an individual client need and his or her situation. As a client, they should know all the advantages and disadvantages but of course, they are under the supervision of a certain type of insurance agent that can be biased and try to sell what they have to offer to form their companies. Avoid an agent that focuses on selling one type of product. Talk to an agent who can provide the knowledge of each type and you can choose what best for you.
Great comments and the article was interesting as well. I had a term policy which expired and it made me wonder if i should have bought a whole. This was useful reading. Thanks to all and Matt for comments.
I have been paying into a whole life for 8 years, do I get out of it? What do I do after? My love ones outlived their term policies and the burden of burial fell on the family. I had a term life for 5 years before getting a whole life. I lost my job and they dropped me in two months for lack of payments. All that money I paid into the term was lost and getting insurance when older was more expensive. So the next time I went with whole. They don’t drop you as fast if you can’t pay the premiums during a job loss and if they do you get at least some money back. After reading this I feel I still made the wrong decision.
You seem to be suggesting that NO one at all ever needs life insurance past the age of like 55…..seems odd that you wouldn’t want a death benefit when you’re actually statistically more likely to die…..I am a bit confused by that…And if whole life isn’t a good investment then term life certainly isn’t unless you die during the term of course….Term insurance is like renting a home you pay and pay and pay and pay and you potentially never get a return. Except I could argue renting a home and being able to live there is more advantageous than renting insurance and what hoping you will die so your kids will get the money?
The primary purpose of life insurance is to protect the people who are financially dependent upon you. Once those people are no longer dependent upon you (e.g. your kids grow up), you no longer have the need for that protection. Term life insurance is like having car insurance for as long as you own a car. Whole life insurance is like having car insurance forever, even when you no longer own a car.
Except whole life insurance and term insurance can be used as a way of providing or adding to a legacy for your children even though they are not dependant on you.
Also, you said whole life is not an investment. But by definition, it is an investment. An investment is simply where you put money into something expecting a return in the future. And whole life insurance does provide that. Plus if it is a mutual company as mine is then you become a partial owner which means you get to vote and help the business make good business decisions.
Lastly I believe you said your return was only .74% which I agree is low but just because you had a bad experience with a bad policy doesn’t mean all other whole life policies are the same. Different companies provide different returns and even different coverages. You’re being very general when more specific information is much more relevant in my opinion.
First of all, I never said that whole life insurance is not an investment. I said that it’s a bad investment. You’re arguing with a point I never made.
Second, I used the policy illustration I received as an example of the kinds of policies I see all the time. Of course every policy is different and needs to be evaluated on its own merits, but the truth is that most of these policies behave similarly. The policy I evaluated personally was actually one of the good ones and was backed by one of the companies that many people look to as the “gold standard”. So it was not a “bad policy”. It was typical of one of the “better” policies.
Finally, if you’ve already handled all of your other financial goals and you still have disposable income leftover and you want to use that money to buy a permanent life insurance policy that will leave an inheritance for your children, by all means go ahead and do so. But the vast majority of people will never be in that situation, and even if you are in that situation you will likely want a policy that’s specifically tailored to minimize fees and accomplish the goals you want to accomplish. Most whole life insurance policies will still be inefficient and unnecessarily expensive.
Might i ask what companies policy you were referencing? And what specific kind of whole life policy it was? Was it custom whole life? Value whole life? Traditional whole life?
It was with Guardian. A traditional whole life policy with paid up additions.
I am looking at it all from the perspective of an inheritance. In my line of work, I see pensions and IRA’s taken by healthcare and Medicaid all the time. Heirs are left with nothing and it is sad. Im researching and researching but cannot find something that is safe enough, can grow to at least $100,000 for thirty so years, and cannot be taken touched aside from….life insurance. I have elderly grandfathers who left their families w/ something because of life insurance. My veteran grandfathers
had plenty of money and investments however, following NH level of care and death nothing was left… only his Whole Life and land. Good thing he had placed his land in his children’s name 10 years prior!
Well the cash value in life insurance is counted as an asset for Medicaid purposes as well, so unfortunately it doesn’t help you there. If leaving an inheritance is a priority, then buying some type of permanent life insurance policy could be a good way to do that. But only if you but the right type of policy and only if it doesn’t negatively affect the rest of your financial plan.
I bought two Northwestern Mutual policies forty years ago. I had the first and paid $40 per month, then added the second in a few years and paid $80 per month from then on.
Keep in mind this was before there was any such thing as IRAs or 401Ks.
They insured my family all the while I was a young Dad working, saving for college, mortgaging our homes and such. I could have borrowed against them, but didn’t. They would have paid off if I ever became disabled but thankfully it never happened.
Now the $80 / month I paid over 40 years has been converted to an income plan that pays $760/ month until I’m 85. I don’t regret the policies at all.
I’ve found from my experience, people either plan, save and invest or they don’t. Those that procrastinate and nitpick over which investment may be better than another are wasting valuable time and usually aren’t that successful. If someone starts saving and investing EARLY and accumulates a diversified retirement portfolio they will never look back and wish they had done differently.
I’m glad those policies worked out for you, and I agree that the simple act of saving money is more important than the specific investments you choose, especially at the beginning. With that said, it’s also a good idea to invest that money as efficiently as possible and I do not think that whole life insurance provides that efficiency for the vast majority of people.
A few comments… You shouldn’t ever be buying whole life insurance for purely for the reason of investing, you buy any life insurance because you need life insurance, the investment component is secondary. So not sure why we are analyzing it purely as an investment (I actually do know why, because some agents try to sell it this way, and Matt is trying to help them avoid a pitfall).
As for it being undiversified, NO investment by itself is completely diversified. Cash value life insurance can ADD diversity and security to a portfolio (the top companies have incredible financial strength, good policies can have a solid conservative return while meeting a life insurance need). Diversification is an issue with cash value life insurance if it makes up a good portion of your assets, and if it would, you shouldn’t be buying it.
But here is the key: the most astute line in the article is “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.”
Right on! THAT is where it may be an appropriate product. I’d argue a bit more than 1% of the population meets the guidelines above, but the point is correct.
I think everyone here that is naysaying Matt’s article needs to realize he is speaking generally to the masses and not the upper middle class/affluent. Matt, perhaps move that paragraph I highlight to the front of the article to disarm some of these people and clarify you are speaking to people whom buying whole life would come at the expense of maxing their 401k, owning their home, having emergency savings, stocks etc… For those that have the aforementioned AND have a life insurance need, a good policy with a quality company may be worth considering. But for young people especially with limited assets, term insurance products are preferable. Perhaps re-title the article “Why Whole Life Is Not Appropriate For Most People”.
Whole life is insurance not an investment. You buy it so the day you pass on your family will have money to ease their grieving by giving them time off, financial security, and most importantly for whole life insurance to pay the cost of your funeral, etc. It can mean a lot to people to have a nice funeral for their loved one as a proper send off. I view whole life as a product, like my house, which I also don’t view as an investment.
Thanks.
Interesting read, I certainly agreed with the lack of transparency and fees associated with some policies. I would disagree though that it is undiversified. Take Northwestern Mutual, an almost 300 billion dollar general portfolio that you participate in as a policy owner. Most is bonds, like all other companies, but the remaining investments are private equity deals that as individual investors, we would have no access to. Also keep in mind that the equity in policies are extremely safe. Look at any market crash, and compare what dividends we’re paid out by the top companies. The equity in the policies do not go backwards which makes it very attractive when you’re retired because you’ll have no other sources of money so well protected and still growing at 4%.
I still believe the policies are oversold and are not a perfect fit for everyone, but it really is a case by case basis. I’m also interested in how the long term care hybrid whole life policies will change the landscape moving forward.
Well written article that really broke down the confusing product!
Your premise is that whole life insurance is a bad investment. Fine, however, it is not a bad purchase. It is insurance and when thinking about the defined purpose of insurance then it can be a different story. Your electric service is a bad investment but think of the difficulty in living without electricity. Sure you could invest the bill amount each month into a nice Roth IRA but we seek the benefits of the service and willingly pay the bill. I suggest that people look at insurance the same. In my case and for my intent, whole life insurance was prudent. Like any car lease deal or stock purchase, there can be good and bad deals; one should not declare all forms at all points in time to be definitive. I gifted my child a whole life policy. The rates for a young person are as good as they get; she will never have insurance bills nor be without insurance. There is much left to explain but in short her $25,000 baby policy is growing $1,000 per yea. She will never have to pay a premium but will have $225,000-$350,000 payout one day while providing some protection also during the income/mortgage/child rearing adult years because I purchased it for her at the cost of $120.25 per year! No way could a poor farm kid without inheritance or wealth and limited income but high student loan debt create that kind of wealth for his children in the immediate or most vulnerable time period. To leave her in the same boat, as my parents did, is in no way wealth building. I got married and had mortgage, student loans, and large term life insurance bills because to go without any seemed irresponsible having no wealth but whole life was too expensive. So yes, it is far from a great investment but it is the most responsible gift I ever gave my child. It will not depreciate like a car and it is more certain than lottery tickets! Could I really produce that protection for her with liquidity via investing for only $120 per year? Tip: an insurance agent once told me (he should not have mentioned it) they have NEVER paid out on a life insurance policy because people always eventually let them expire and quit paying on them. Rates are so cheap for young healthy people because they are not likely to die. So this is also an exercise in discipline and responsibility not just finding the right stream to pan for gold.
You forget to mention a couple of key points:
1. Cash Value. Yes, you can borrow it. Bad Idea. But did you know that if you die, you do not get your cash value, only the Face Amount of the Policy? If you live to age 100, your cash value is paid up and the policy is matured. If you die, again, your heirs do not get the cash value. It disappears magically. You cannot get both the cash value and the face amount of the policy. If you borrow it and don’t pay it back, it is subtracted from the amount paid to heirs at death.
2. Retirement? Give me a break. No one retires with a cash value life policy. At best, cash value grows a 2-3% interest. Buying mutual funds and utilizing the stock market with an IRA is the way you do retirement, not with Life Insurance. If an agent talks about a policy as an Investment, throw that bum out of your office or house.
I would never buy term life. A good friend of mine died unexpectantly 2 days after age 70, which was his cut off. He paid a ton of money in and his family got NOTHING!
There is no right or wrong answer. Buying term insurance is as stated a pure play, cheap when young, expensive when old or with medical issues. Whole life from a bad insurance company is bad. However, one of the best ways to invest money is to diversify. Often, customers buy “Universal” whole life policies that are underfunded, meaning as they get old, these policies become expensive and are often cancelled. Not good. What I have done was term policies when young along with a small (50k) whole life policy. Having a whole life policy allows forced savings and a build up of capital. With the right policy with guaranteed returns, my whole life police has doubled in value and will be inherited tax and probate free to my dependents. If I had no money, it would pay for my funeral and leave funds to my spouse. I have saved and invested money, have multiple 401K’s, and no longer need the insurance. However, 30 years ago, I could not predict the future, and if I had to do it all over again, I would still buy the same policies. However, times have changed, interest rates are low, and the future is uncertain. I still believe, a small whole life policy with a great company (constant, unchanging premium) for a young family just starting out is a good way to provide some security while forcing one to save and invest capital. Is it the best way to invest? No. But many young do not know where to start and it is a great start. Also note, that often as the cash value increases, the death benefit also increases in many policies. Hindsight is always 2020, but one cannot predict the future, that is why we buy insurance. I also found that converting a term insurance police into whole life can be very expensive. Would a whole life policy be my only investment. No. I buy stocks, bonds, CD’s, have 401K, IRA, bank deposits, etc. A whole life policy is a small slice of the pie; diversity. In summary, both policies have merit.
Thank you very much
Hi,
I enjoyed reading the article and the comments here. Thank you. I’d like to add some thoughts related to why I purchased a whole life policy because I think it might help others. I think there is a lot of misleading info out there. I am not an agent and don’t sell any financial products.
None of the below should be taken as actionable advice. You should consult someone who you know and trust before making any important financial decisions. This is just a window into how I made my decision, so you can see some things I considered. I might be wrong about some of these things, but everything I’ve written below is what I believe today based on my current understanding and the guidance of my own advisers. Please note that I do also max out my 401k and IRAs and keep a modest taxable account as well, so whole life is just one piece (albeit a fairly sizable one) of my portfolio.
Why did I do whole life?
1) I believe that when done correctly, it is insurance that CANNOT BE TAKEN AWAY. One of the most important things about whole life is that the annual premium is FIXED at a constant level FOREVER and the death benefit cannot be taken away if you continue paying in (these are the basics but I think worth repeating). I bought my policy at age 32. If I get heart disease, diabetes, or any of thousands of exclusionary conditions over the rest of my life, it does not matter. My insurance will not go away. If you rely on term insurance, then even if you get a 20 year policy as a 30 year old, then at age 50 there is a good chance you will either i) have to pay MUCH higher premiums to continue your coverage or ii) not be able to get coverage at all. It is just like health insurance before ACA. If you think you can keep rolling over term life, you are taking a very big gamble. This is probably fine if you are only insuring to protect your family in your early working years. But if you want to make sure your heirs eventually get a benefit on your death, term life is a bad gamble. Which leads into #2…
2) With whole life, if you keep paying your premiums, your heirs will ALMOST DEFINITELY GET PAID. For instance, if you have a $1mn policy at $10k/year of premium, you know with near certainty that your spouse and kids will one day get $1mn. Even if you are paying in $10k per year which is a lot of money, then if you start at age 30, you will pay in $500k cumulatively by age 80. If you die at 80, your heirs get $1mn. Also keep in mind that this benefit is generally NON-TAXABLE!
There are at least three good objections to the above. Here is how I think about them.
Objection 1: Insurance is not an investment. You can do much better by buying term insurance, keeping the difference in premiums, and investing it yourself. For instance, even that $1mn payout after 50 years you mentioned is a horrible return on your $500k of cumulative contributions.
Response 1: This has to be the most common objection. I understand it, but I don’t totally agree with it, so please give it a LOT of thought and decide for yourself. Let’s begin with the idea that insurance is not an investment. That is false. It is absolutely an investment. You spend money in expectation of a financial return, the size of which is usually known but the probability of which is oftentimes unknown (because many people cancel term policies or cannot renew them before they pass away).
For term life, I’d agree that it is usually a really bad investment. Why? Because a lot of people only pay in their premiums and never get any return. If you have term, then by the time you are older and your kids are self-sufficient (hopefully), your incentive to keep renewing will be pretty low. You may indeed just stop paying in and let the insurance lapse. Or, also quite possible, you will have to renew your policy but the premiums will be way too high because you are now much older and your health is worse. In some cases, you won’t be able to renew it at all.
With whole life, both the MINIMUM size (your guaranteed cash value or your death benefit, depending on how you’re modeling it) and probability (100% if you keep paying) are known. So it is easy to model out your minimum expected return. And yes, that return stinks. It is usually far less than what you’d expect from investing in stocks. But there is a good reason for that.
First, THE PROBABILITY OF GETTING THE PAYOUT IS SUPPOSED TO BE 100%! It is a GUARANTEED return, so long as your insurer lives up to its obligations (more on that below). So it is a much less risky investment than almost anything other than cash. But CD rates will often look better than the whole life return, so why not invest your money there? Well..
Second, the minimum guaranteed return is only a minimum. Good whole life policies have a history of paying out well in excess of the minimum. Cash CDs absolutely do not. So with whole life, you have more upside. But if its upside I want, then why not just take my premium savings and invest in stocks, bonds, etc?
Yes, absolutely, you should usually expect a higher return from a diversified portfolio of risky investments than from a guaranteed death benefit. But please, please keep in mind the following:
1) With whole life, once your cash value starts building, it generally doesn’t go DOWN. So if you are 65 years old, you know EXACTLY how much you have to withdraw from your policy or borrow against, and you know about how much you’ll have 10 years later.
2) With a portfolio of risky assets, the LONG-TERM RETURN is expected to be higher, but the variability around that is MUCH higher. In pretty much all of the “expected return” analyses that people on the internet show to compare whole life to term life + investing the difference, they are just comparing annualized returns or an IRR on a zero-volatility return stream. What they don’t account for are situations where the market crashes and you panic, wanting to move money into cash, or having to draw down on assets because they’re liquid and you can. This is normal behavioral stuff that occurs all the time, and reduces the power of your compounding. If you and your adviser are sure you can avoid these common pitfalls, then that is great and you might want to go for it. But don’t dismiss the reality. Also when running your simulations, make SURE to tax all of your realized capital gains and interest income along the way, and unrealized cap gains at the end. It can make a big difference.
One thing I do agree with is that you probably shouldn’t buy whole life unless you are already maxing out your other tax-advantaged accounts like IRAs and 401ks. I personally would make sure to do that first unless I had a pressing need for the whole life death benefit.
Objection 2: The payout is not in fact certain even if you keep paying your premiums, because life insurance companies can fail or decide to just not pay you.
Response 2: OK, that’s fair. There is no way to counter this perfectly if you are that skeptical, which it is your right to be. For me, I insure with a company that I have close to zero doubt about delivering on its promises. You should keep in mind that insurance investment portfolios are generally quite boring, if you’ve done your homework and picked a good provider. They take the float from the premiums and invest in a broadly diversified portfolio of fixed income, equities, and alliterative assets. At then end of the day, I suspect it is almost certainly a more conservative portfolio than what you’re financial adviser is running on your behalf if you are a relatively young person with low liabilities.
Objection 3: People who try to sell you whole life receive commissions, are scammers, etc.
Response 3: I’m sure that some are. It is up to you who to trust. I’d suggest asking up-front how these people are paid, because some are non-commissioned (e.g. if your employer pays them a flat fee to consult). But also keep in mind that you don’t want to take your advice from people with the opposite bias, either. Financial advisers are often paid on discretionary assets managed. If they are, then their incentive is clearly for you to buy term insurance (or no insurance) and let them invest as much as possible on your behalf. Just be careful and take a long time to think through the issues.
I hope this is helpful discussion to some.
Thanks for the thoughtful comment Dan. While I do not share the same views with you on all of this, I appreciate the way you laid it out.
One point I would like to counter is the idea that whole life “is insurance that CANNOT BE TAKEN AWAY”. It can be taken away if you are not able to keep up with your premium payments, which is pretty common given that people’s lives and financial situations are constantly changing. With some policies, the premium can even go up depending on the performance of the policy, forcing you to pay more than expected if you want to keep the coverage in place. So it’s not quite as simple as saying that the death benefit is a sure thing.
I enjoyed reading this and have made some wonderful notes. Now onto the question. We do not have children. It is just the two of us. We have nieces and nephews and one of them may be our caretaker when we get older and will have to help with funeral arrangements. So the question is… what life insurance would be best or, at least, better for us? Which life insurance is better to make sure that one’s partner is taking care of after the others death? leaving an inheritance is not on our list, just the need to make sure that we are taking care of financially when the other passes.
Great question Megan. Here’s a post that shares just about everything you could need to know about getting life insurance in place: The New Parent’s Guide to Life Insurance.
The short answer is that some kind of term insurance would probably meet your needs, if you even need life insurance at all. If there isn’t anyone who is financially dependent upon you, then you likely don’t have a need for life insurance.
I’ve been in the life insurance business for over 10 years. I hear more often about people losing money in the stock markets, 401k’s and other variable products. Some have lost in insurance products from cashing out, lapsing or being sold an incorrect product. But I’ll bet on the insurance companies over wallstreet any day. You can lose in both arenas if you’re inexperienced or sold by inexperienced individuals.
Hi, Thanks for the information. Insightful. Curious, what are your credentials?
You’re welcome. I’m a fee-only CERTIFIED FINANCIAL PLANNERTM.
Two words – Garrett Gunderson – look him up.
Just looked him up. He looks like a scam artist.
I am 52 years old and looking into a hybrid/whole life insurance that has a $500,000 death benefit policy or qualifying disability benefit through Pacific Life. The total cost is $100,000 paid over 4 years ($25,000 per year). The agent selling this policy provided me with the company’s rate of return for this particular product, which averages 6 to 7%, over the past 20 years. Based on the agent’s projection, it will take 4 to 5 years for my surrender cash value to become $100,000, and the value should continue to increase year after year at an average rate of 6 to 7%. At age 85, the policy limit of $500,000 will match the surrender value if the value is greater than the policy limit. I have a sizeable saving consisting of 401k, stocks, and real estate holding that should generate $4k to 6k a month when I retired. After reading your blog about the whole life insurance, I am wondering if investing my 100K in this hybrid/whole life insurance is a good investment strategy.
Thanks for reaching out Winson. I can’t say whether it’s a good investment strategy since it really depends on the specifics of your overall situation and all of the various goals you’re trying to achieve, but I would definitely encourage you to use the illustration to calculate the projected returns for yourself. 6%-7% sounds incredibly high, and it’s not uncommon for these agents to quote you a return that is much higher than what the numbers actually show.
The 6 to 7% rate of return does seem high. I will have to do more research in this matter before I enter into this whole life contract. But thank you for raising this issue.
Hi Winson,
I was tempted to respond to this because I am considering something similar. My premiums would be 35K for next 10 years after which I would need to pay nothing. My cash value would be equal to the total of all premiums paid at the end of 10 years. So in essence, I am now at break even and I have a policy with 1M death benefit for rest of my life and 350K cash value built in 10 years. If I leave this as is, over the next 10-20 years, the cash value will double and the death benefit increases. This is based on guaranteed rate of 4%. I am yet to discuss the specifics with the agent and do my own analysis on this. So I cant completely comment on this yet.
I agree with Matt that without knowing your personal situation and objectives (why you want to do this and for whom), any suggestions would be sub-optimal.
Things to consider in your analysis and ask your agent:
1. How are they making these 6-7% returns?
2. Has there been any year when this return has been 0 or negative? If it is tied to the stock market, what happens when the market returns are negative for a year? I was shown a policy where the return was capped at 13% but my policy would not lose value should the market return be negative in any given year such as 2018. This was a index universal life insurance. That said the premiums were super high and the IRR after 20 years was only 5%. It didnt make sense to me from a pure investment standpoint. However, there are some tax benefits to it and the ability to take a loan on cash value which apparently the interest fees would be waived by the company per the agent. So in essence I would owe nothing. The IRR for death benefit was much higher which is an interesting concept to me. Why would I care about IRR for death benefit? I am not alive at that point. IRR means nothing by itself. It is just a number to compare two alternatives. What is more important is the final death benefit in $$$. Do you think that would be enough in 30 years for your family considering other sources of income? There is a general tendency to think that ‘more is better’. The problem with that mentality is that ‘more’ is very abstract and our mind cant really grasp what that is. Our mind works better when we are more specific about what we want and it makes decision making easier. So figure out why you want to consider this investment and whether it will accomplish your objective. Do you think you can do it better personally through your own investments? If you have the answer to these two questions, the solution will become evident.
Hey Mat I’m glad I ran across this. I am a 60 yr old single parent and since the yr 2000 started my first life ins Policy . I also opened a policy for both my mom and dad and I was second on their policy as a beneficiary and I paid for all 3 of us my parents both have passed , and last yr in 2018 I calculated that I have spent well over 200k so I was thinking about whole life but after reading all this I think sticking to term life is probably best I just get upset when I think about all the money I’ve been paying into for a lousy 25k pay out . I have 4 children and 3 grandkids what do you suggest ? I would really like to know and how do some of these cases I hear of people leaving their 6 children 80k each how do I find term life companies that pay out a large amount to be able to give 6 kids that much each I could never find one. Any suggestions as to a company that pays a high return ?
Sorry for the slow reply Gaby. Unfortunately term life insurance is generally not a good way to ensure that your children will get some money no matter when you pass simply because the premiums get extremely high as you get older. While I can’t make any personal recommendations without knowing more about your situation, it is often a good idea to simply save/invest your money in a situation like yours. That way it’s available if you need it and can be passed on to your children and grandchildren if you don’t.
Very interesting article and lengthy thread of comments, and appreciate the author’s response to comments throughout for a post several years old now.
I got onto this post from a search about the pros and cons of buying whole life insurance for children, something I have already done but am thinking of doing more of when my kids each turn 18, but wanted to review further. Also, I am considering a hybrid whole life and long-term care policy for my wife and myself.
I am not necessarily directly responding to either the original post or other comments, but thought I would share our experiences and priorities, and why some whole life has a role in our lives and why we might a little more…
1) Agreed that whole life on yourself generally makes sense only after other instruments (401k, IRA accounts, etc.) have been used or cannot easily be used, and if you’re in the likely target audience of this post, then I agree that term life insurance is probably higher on the priority list than whole life. I probably rate whole life near the bottom of priorities, actually, but that does not mean never-ever, even for people who might on the surface not appear to be ideal candidates for it. Here’s our approach … in chronological order of the steps we’ve taken and are considering taking in the near future…
2) For a single $1,000 premium per child, I was able to get whole life insurance with a ~$11,000 death benefit for my children when they were new- born and 2, respectively. The illustrations have held up fairly well, the death benefit has grown annually, and as I am 10 years into those policies the cash surrender value is now approximately back to the premium I paid, which is exactly what I was told when I purchased them. I am aware of the general advice of not buying life insurance for your children, but as we are able to save for their future needs in addition to having these small policies, I am pleased with the peace of mind; had some tragedy happened involving both of them at the same time, I know we would not have been able to afford the services all at once out of other funds. The 10 years to get back to the premium level paid seems a reasonable price to have paid, but that is purely subjective I suppose. At more or less the same time, my wife and I bought term policies on ourselves, in our early 30s.
3) A couple of years ago, my wife and I in our early 40s went ahead and bought very modest (less than $100k) whole life policies (again, after maxing out other long-term saving/retirement deposits), I would say primarily because we still wanted some form of actual death benefit after term policies will expire at around age 60. We spend roughly the same amounts on our whole life and term policies, and I would agree with 12x difference – that is, for very similar premiums, the term policies offer death benefit more than 10x death benefit of the whole life (granted, the term policies were written when we were 10 years younger). We may eventually give up the term policies, but they are relatively cheap and we have not decided.
4)Still in our early 40s, we have seen multiple family members older than us see their lifetime assets eaten away by a need for long-term care needs. We are considering strongly the hybrid whole life policy with a LTC add-on. I understand these are popular, and I can see why – hate to spend more money on purely LTC insurance that I might never need, so the hybrid whole life / LTC takes out the risk of getting nothing out of what you put in; somebody will eventually benefit. NOTE – the policies I have been quoted for this are called a “2nd to die” policy, so the death benefit, if there would be any remaining, is only paid out after the 2nd person dies. Even pricing these in our 40s the premiums are fairly expensive relative to our income, but only getting more expensive if we wait. The policies we have seen along these lines seem to be either ones paid-in-full after 20 years, or the premiums are paid in perpetuity until the 2nd person dies; obviously the 2nd option drastically reduces the premiums. I wish these was a 30 year paid-in-full option, but our agent is not aware of such a policy.
5) Several comments have stated that whole life policies are useful primarily for 2% or high net worth individuals and families. It may be true that they are more useful for high earners, but for fiscally disciplined middle class families, there can possibly be a place for it; I think a great deal depends simply on your priorities and knowing what you can afford and your other saving versus spending habits. We are classic middle class family (household income well under $100k, 2 kids, both still at home, live in the midwest where cost of living is pretty cheap), and while we had more than our share of good breaks financially, we’re not likely to ever get rich from income. We save hard, spend little, drive old cars and don’t spend much on fancy gadgets and even shop at second-hand stores sometimes, but we want to protect what we have worked to put aside. The upside to all this is a forecast of having well over $1.5 million in retirement assets as well being able to have ~$30,000 for each of our 2 kids for college, own a home, have at least 6 months of salary in emergency funds, and hopefully be in a position to pass along some wealth to the generation after us. Clearly we are making a conscious choice to sacrifice now in order to hopefully 1) either live well in retirement, or 2) make sure our family is well provided-for in the event of tragedy before we make it to retirement.
I get that few people are like us in terms of fitting both our income profile and and savings profile, but for those few who are, I think it possible whole life could fit a legitimate place as one piece in the larger picture of pursuing their objectives.
This is an interesting read, the article and subsequent comments. I think the right answer to whether whole life makes sense or not is “It depends”. If we are trying to generalize and come up with a one-size-fits-all approach, we are having a tunnel vision. I am neither a CFP nor a CLU, but I have the basic understanding of how to look at investments and do a IRR or NPV analysis. For folks who dont have that level of understanding or lack the ability to analyze, it may be worthwhile for you to empower yourself with how to evaluate choices based on ROI/IRR/NPV, or your target $$$ number you want in future. If you rely on someone else to do the homework for you, it comes with a possible cost of being misinformed and making inappropriate choices as a result. Further, even if you have the information, how do you use it if you dont have the basic skills and knowledge to make sense of it and arrive at your own conclusions? for e.g., if someone says the IRR is 5%, what does it mean? Is it good or bad? How do you make sense out of it?
Pretty much anything can be quantified and looked at as good/bad investment. But a decision cannot be made only based on numbers. Sometimes, there are non-quantitative reasons based on which decision need to be made. For instance, my wife had a term life convertible to whole life policy. After we had two kids, I tried to purchase one more policy to increase her death benefit. Unfortunately, she was declined insurance by multiple companies due to family history and health. Given this situation, I decided to convert her existing policy to whole life. Do the numbers make sense? No, if I were to compare the returns against investing that extra premium in an index fund, assuming the index returns are going to be the same as what it was in last 10 years. (Most folks are given a historical average return for stock market and sometimes these returns are based on what the market has done over the last 10 years or max 20 years. But nobody ventures into looking at market action prior to 1980s. There were periods when the market did not yield a positive return but nobody talks about it. If anyone does talk about it then they present as returns over last 50 years which makes no practical sense. Over these 50 years, the market basically provided many opportunites to make money but the average investor investing in index funds did not realize it because they were too scared to learn and empower themselves to be beyond average. Again returns are not the sole metrics to look at. What matters most is the $$$ you have in your account at the end of the day. This is a whole another topic. So I am going to end it here).
Most people are concerned about uncertainties with the insurance company being able to pay the benefit. The same applies to the market if you dont know how to analyze and invest. When you are making a comparison with an alternative choice, it needs to be an apples to apples comparison in terms of time, resources, skill, and risk. Besides these, there are non-quantitative factors to consider like I mentioned in my case.
I probably fit into that small category of people for whom whole life is a good idea. I have completely paid one off and will never sell it. I have no family of means, or none that will be alive when I pass on. I have zero or few friends of consequence. Few people I personally know have an understanding of duty and obligation. I am retired from the US Navy, yet there are hundreds of plastic urns sitting on dusty wear houses filled with ashes of my military brethren. I seriously doubt anyone will spring for an obituary when I die. The policy I purchased assures I will be buried in a casket (a cheap one, but a casket none the less). I will likely be buried in a local military veterans cemetery, and they will fly my flag in honor since no one will come to claim it. The policy is not an investment and never was intended to be one. It simply assures that all state fees and the casket will be paid for, because no one else will. My mother had one of those term life policies, which was denied by the insurance company (I had to foot the entire bill personally). I do not expect anyone to be that considerate when I pass on.
Interesting article though.
will,
if you are, in fact, retired military you are eligible for a free burial service and plot and marker. it is part of your VA benefits. please look into it . thank you for your service.both hubby and i plan to use this entitlement.
as for ltc hybrid and whole life, we plan to use vgli for 5 years at full military retirement, term policy to age 67 when social secuirty kicks in and whole life with a ltc rider for husband and plain federal ltc for myself.
this is a very interesting article. my 2 cents are that lars has thought this through and we concur with the plan and have adopted the same plan for ourselves. good luck
Except the fact that if you have a term life insurance and you live past 70 you are screwed since most policies will have expired by this time. To get any life insurance after 50 is crazy expensive. While if you got a whole policy in your 20s for very affordable, you and your family would be covered until you are no longer around. All insurance is a gamble. But I’d rather be fully protected then hope I die before the term expires.
My parents term policy expired when they hit 70, now they have no life insurance and any type of policy to cover the next 10 or 15 years of life in them is well over what they would have been paying had they gotten a whole policy when they were younger.
Every situation is different and some people certainly could use life insurance in their old age. But in many cases there is no longer a need because there is no longer anyone who is financially dependent upon you. That’s the beauty of term insurance. It allows you to get the most coverage at the smallest cost for the period of time you need it and no longer.
Hi Matt, great article. I bought whole life and have been paying my premiums for 2 years now. I have grown more concerned about this whole investment after reading your great article. Any advice you’d give to folks that are already in the policy but are thinking of getting out? Thanks!!!
It’s tough because those first couple of years are typically the worst in terms of performance and that money is lost no matter which way you go. It really comes down to evaluating your overall insurance needs, your other goals, the expected performance of this policy going forward, and other investment opportunities available to you.
From a pure investment standpoint, I would consider your policy’s current cash surrender value as cash in hand. If you had that money in your checking account right now, would you 1) invest it and the future premium payments into this same whole life insurance policy, given what you know now and what you expect the returns to be going forward? or 2) invest that cash and the future premium payments elsewhere?
Thank you! Very helpful. It’s tricky… I’ve personally contributed $24K so far over the last 2 years… Cash value is just $7K, so it is a terrible moment to get out. I am considering a couple options:
– Surrendering. That would mean making a loss of something like $11K (assuming I get whole cash value back and a ~$3K value of life insurance I got over these last couple years)
– Keeping it as is and pulling out in a few years once the cash value has realized some gains… I think that happens at around year 16 :-/. Do you know if when that happens, it is as easy as just pulling the money out? Do you typically have to pay taxes then?
– Reducing the face value… I am considering just dropping this from $12K/year down to $6K. Any thoughts on what to watch out for if I do that?
Thank you for this great site. It has been incredibly helpful to find this community amidst the anxiety this has caused.
Unfortunately, for state compliance purposes, I can’t give any specific advice outside of a client relationship. What I can say is that while I understand the temptation to hold onto the policy long enough for it to break even, there’s no reason to do that unless you think that you’ll break even quicker by holding onto the policy then by investing that cash value plus the ongoing premium payments elsewhere. Again, the way to think of it is that you have the cash surrender value in a bank account right now, and you can either choose to invest that money plus your premiums into this policy, or you can invest that money elsewhere. It should eventually break even either way, so it’s a question of which route better fits your overall goals and situation.
Hey Matt! Was looking for an article to send to a client and came across your super-well thought out post here. As somebody who spent 5 years in a mutual insurance firm I can tell you I agree with all of your comments and support you on all of this. Awesome post!
Thanks Jude! I appreciate the backup 🙂
Great read!! Thank you. Buy Term and Invest the difference!! I’ve seen so many awful whole life and IUL policies, it’s so frustrating when you know most agents will only sell it because of the fat commission. Then you have the agents that just don’t know what it is they are actually selling but when you try to enlighten them the don’t believe you.
I love educating my clients and giving them a real shot at retirement. It’s the greatest thing I have ever done other than being a Mom.
So glad I happened upon your blog, thanks
AJ
Found a letter with a life policy number on my husband that was bought when he was 5, he died in March at age 85. I called but could not get info since there was no beneficiary listed.
Would this policy be worth the trouble to collect since it was bought in 1939?
That’s a tough one Peggie. This is outside my area of expertise, so if it’s a substantial amount of money I might consider talking to an attorney. If there really is no beneficiary named you may be out of luck, but I’m honestly not sure.
Thank you for this great, straightforward article. As a complete insurance/finance novice studying for my LAH license you’ve given a lot of food for thought. I knew from the conception of my insurance salesperson plan that I wanted to be well-versed in the financial aspects of insurance policies. So much to learn…….. Thanks again!
You’re welcome Katie! Good luck with your studies.
Interesting post. What I don’t like about term life insurance is that it ends. So if you live say past 80 and then die, unless you had a fair amount of savings, your children have to pay for your funeral costs. These can be quite substantial. This is not a burden I would want them to have. Yes, you could put money in your own account for this purpose, but life insurance is a form of forced savings and if it were liquid people would simply use it for something else.
I do understand that concern Chad. I would simply say that if it’s a priority for you to have life insurance that would cover those costs, on top of whatever other assets might be available, I would encourage you to find a policy that is solely dedicated to providing the death benefit you desire and doesn’t burden you with fees for other unnecessary features.
I am looking at a whole life insurance that has riders for cancer, stroke, etc it’s $250/m premium and 500k death benefit. After one year, You can start paying minimum premium which is 125… i am not sure this could be worth it because of their riders.
Thanks for reaching out Leah. I can’t say anything for sure because I don’t know the specifics of your situation, your needs, or the policy in question. Here are a few general thoughts though:
– Be very careful about any promise that your premium will decrease in the future. Sometimes that pans out and sometimes it doesn’t.
– Even $125 per month is a lot for a $500,000 death benefit. There’s a good chance you could get the same benefit, or an even greater benefit, at a much lower cost with term insurance.
– I would be very thorough in understanding exactly what those riders do and do not cover, and how that coverage does or does not overlap with other insurance coverage like health and disability insurance.
The bottom line is that it’s all in the details. The details of what exactly you need, what coverage you already have, and what coverage this is actually offering.
I’d like your thoughts on a situation which might be different from most people considering a whole life policy. My wife and I adopted two children in our late 40’s/early 50’s. At the time, I had a term life policy with steadily increasing premiums that was going to be completely unaffordable in my late 50’s/early 60’s. As a result, I converted my term life policy to a whole life policy. The annual premiums for this policy are very high and I would certainly prefer not to pay them. However, I needed the protection of an insurance policy as I am the sole breadwinner for my family and I didn’t believe my retirement assets would grow to the point I could retire until I was in my mid-to-late 60s. As a result, we bit the bullet and bought the whole life policy. After 8 years of premiums, at least the cash value of the policy is now growing by about the same amount of annual premium each year. I agree that as an investment, this whole life policy is not good. However, I didn’t see a lot of other choices given that my health is not good and the fact that I am the sole breadwinner for my family. My question to you Matt is what would you have done differently in my situation? Are there better ways of guaranteeing a death benefit without dealing with massively increasing term life premiums once you get into your late 50s and 60s?
OK OK OK I give up! I have read all of this up to now. And I get many things I have read. But here I am with two small Mutual of Omaha plans, one is term the other is whole- and I just started them in the last 7 or so years, and I am 54 years old. I don’t really care much about what happens as far as investments, etc. I just care about having some money to pay for my funeral, etc. My beneficiary is my sister, she’s the most broke in the family but also the most practical. I have no kids. Never will. So I am now more confused than ever: what is the perfect life insurance vehicle for me at this age? I am okay if it isn’t some major investment account and all that other stuff ( have a little money in a 401k-VERY LITTLE)- and I recently started investing about $50/month through Acorns. Its growing faster than expected. SO now: IF I dont live much longer, then my concern is having some money paid out to pay for various expenses (funeral? although I probably just want my ashes scattered in some river) and maybe a few left over bills-? But of course If I live to 80 that’s different-much different. And cash value seems attractive in case I need it… But assuming that I will live that long-etc-the question is WHAT SHOULD I BE BUYING? Permanent? Universal? Keep the Term? Keep the Whole? Merge them/upgrade them? What? I am now confused more than ever. Thanks!
Wow, I read WAY too many of these replies. I commend you for your willingness to still engage over the years.
If I were to write an article on Whole Life, I think it would be simpler to list the few instances where it does make sense.
Then you can say at the end since you don’t have an $11M estate, just buy term.