Whole Life, A Bad Investment?

April 12, 2019

Whole Life, a Bad Investment?

It’s easy to get caught up in the nonsense, or simply write off whole life because of all the misconceptions surrounding this insurance strategy. We have all heard it:

Suze Orman & Dave Ramsey spend a lot of time telling people how bad whole life is!

But Pamela Yellen (arguably) the Queen of whole life and Bank on Yourself, swears by it and has even challenged those 2 by offering $100,000 to them if they can prove her claims that whole is actually a great planning tool. Last time I checked, she still has her $100,000!

It’s a terrible investment because I can do better by investing elsewhere!

Funny, because whole life insurance really shouldn’t be called an investment at all. The truth is there are many examples where having some permanent insurance can make a lot of sense. Honestly, probably many strategies, like whole life, when used properly can be a great fit. Ironically, almost every comparison uses whole life versus a 100% market exposure investment, but whole life is designed to be a guaranteed dividend paying insurance strategy. However, most advisors encourage a blend (asset allocation) between growth and conservative strategies. Whole life is  part of that conservative piece in people’s portfolio, like a bond, providing reduced volatility and ongoing dividends!

It’s too expensive and has lots of fees, the insurance broker uses it to make a lot of money!

Ironically the fees are already built into the product and illustrations include assumptions net of fees, so you aren’t being charged extra. However, it’s important to put that statement in a proper context because those fees are charged just on the actual cost of the cost of insurance and any policy charges, unlike the fee that advisors charge on the total value of the assets for managing your money. For example, a 35 year old male pays $10,000 in premium for $1,000,000 of death benefit. Further, the policy may include a FREE living benefits rider, which allows access to a portion of that $1 million death benefit on a tax-free basis to pay bills if they get sick or hurt. The charges then amount to roughly 1% for $ 1 million of immediate tax free death benefit cash to your heirs, and potentially another up to $500k for critical or chronic illness along the way because of living benefits. (refer to livingbenefitsforlife.com)

Over 10 years:

Life insurance agent gets paid roughly $6000 upfront and gets renewals totaling roughly another $4k for the next 9 years.

An advisor charging 1% management fee on a $1 million account would get $10,000 a year, and if there was no growth over that remaining 9 years, another $90,000 or $100k total! Also, consider if that account went up, the advisor also collects 1% on any increase.

By the way, a real estate broker on a $ 1 million home would usually make anywhere from $30k to $60k, or 3 to 6%.

So who makes the most money, the life insurance agent for recommending that expensive whole life policy? Was it really the insurance broker? The problem is that most people frame the commission for a life insurance broker around the first year and don’t realize that it goes down significantly, and that the cost of insurance goes down considerably more after 10 years! Its assumed that the life insurance agent is “greedy” and doesn’t care about the client’s best interests or only recommends the whole life policy because he or she makes the most money. It’s just another misconception that’s taken for granted when actually suggesting that whole policy could make complete sense!

I wouldn’t have anything left  to show for my money because whole life is bad.

Yes, cash value life insurance is more expensive compared to term, so its  a waste of your money. Ironically, in running an insurance illustration on that 35 year old Male from earlier at preferred, nonsmoker, after 10 years his guaranteed values on the current dividend assumptions for a whole life policy with one insurance company would be $123,221 in cash value for his $10,000 premium payments over 10 years.  In essence, he would get all of his money back, with some growth based on this current lower interest environment.

Remember, this is a conservative cash value alternative in a portfolio that provides additional levels of protection.

Why Whole Life?

Your life insurance will be in-force until the day you die, which helps offset all those stories of people that needed insurance but couldn’t qualify because something happen to them. Better yet, what about those people that had term policies and expired, but they still needed insurance? However, they couldn’t afford the dramatic increase in their existing term policy because it’s past the expiration, or even a new term policy being too expensive now. Saddest of all, is those individuals that die right after their term policy was up! The only policy that matters is the one that you own on the day that you die, which with whole life policy is guaranteed to never happen when the policy, like any insurance, is in good order.

Additionally, whole life doesn’t fluctuate with the stock market, so while other investments may go down, whole life insurance policies are guaranteed to go up each year because of the dividends. Another reason people like whole life is that you can borrow your cash values at any time on a TAX-FREE basis. Unlike most IRA’s or 401(k)’s there are no rules, penalties or taxes to worry about. With whole life you also have a tremendous amount of flexibility, such as decreasing your payments, especially with the “PUA” paid-up additions rider that supercharges cash values. As a matter of fact, we have seen policies where only 3 to 4 premium payments were made, but because of design and performance, the policy lasted 20 years before the next payment was made.

Finally, there’s all this stuff that the “experts” suggest, “buy term and invest the rest!”

Well, the 2015 Journal of Financial Service Professionals debunked that myth claiming, “people most likely rent the term, lapse it and the spend the difference.” The article further pointed out that buying term as opposed to whole life, fails to account for the guaranteed cash value component of the permanent insurance with a whole life policy. The article noted that “the cash values always grow, while a more volatile portfolio of stocks and bonds can rise and fall with the market.”

“BTID” (buy term invest the difference) assumes that you are buying the maximum amount of term insurance to protect your family for the longest period of time that you need it, or that insurance needs will be the same for the next 10, 20, or even 30 years. Again, studies suggest that only 2% of all term policies pay a death benefit claim, and the average life expectancy of a term policy being held is only 6 years. So, it may appear that this guiding insurance principle (BTID) may be only a marketing gimmick with few people actually doing it correctly.

Lastly, term life is only less costly during the guaranteed level premium years, like buying 20 level term and having a fixed premium cost for 20 years. However, once your level term expires, your term policy will jump exponentially, like I mentioned earlier. After about 17 years, if you have to renew, term pricing loses its advantage rather than having had that in a whole life policy the entire time, which never expires! The point is that adhering only to the BTID premise strongly encouraged by most advocates isn’t cut and dry and can vary greatly from situation to situation. The best advice is probably to consider owning both term and some permanent cash value insurance, or talking with a trusted advisor to choose the best path for your needs.

Conclusion

Hopefully, you have seen that the blanket statement, “whole life insurance is bad,” isn’t to be taken at face value and that whole life insurance may actually add long-term value or make sense for a piece of someone’s portfolio and goals. I know it’s been said many times before, “the only two things in life for sure are death and taxes.” Ironically, life insurance can help with both, and remembering that term insurance is temporary while whole life is permanent. Nobody lives forever, and at death our assets could be taxed in numerous ways, so life insurance can help your heirs tackle that problem. Also, it leaves behind a tax-free death benefit, income and cash for expenses.

Whole life is designed to be a conservative alternative for cash savings, possibly even a bond alternative that provides a solution to a permanent problem..death! It’s just a piece to your overall portfolio, and was never an investment to compete with the possible stock market returns harped on by Suze Orman or Dave Ramsey. Better yet, that your agent must be “greedy” or doesn’t have your best interests at heart by suggesting this type of policy…every situation is different.

Owning a whole life policy insures a permanent cash legacy, can be used for many different purposes, reduces overall portfolio risk, has tax advantages and dividends, doesn’t mean use it or lose when paying your premium dollars with many insurance products. It can provide additional income or provide cash value during retirement that can help your money last,  and it offers insurance that never goes away.  Finally, remember that it still is insurance and should be used as an insurance program.

However, tell me where you can put up $10,000 and get a $1,000,000 tax free return if you die, or access to as  much as $500,000 if you suffer a critical or chronic illness with living benefits? Last time I checked, that’s pretty good peace of mind!

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