by dr. james m. dahle, founder of wci
There are over 400,000 insurance agents in this country, and almost all of them would love to sell you a whole life insurance policy. if you buy a policy with premiums of $40,000 per year, the commission would normally be between $20,000 and $44,000 for that agent. As you can imagine, that commission can be very motivating, especially given the median income for an insurance agent of $49,840. To make matters worse, many of the worst policies offer the highest commissions. Unfortunately, the vast majority of policies sold are sold inappropriately, and the vast majority of those who sell them are salespeople posing as financial advisors.
Reading: Why is whole life insurance bad
As a result of this ridiculous conflict of interest, agents are often able to dismiss some serious myths in an effort to persuade you to buy their product, which could explain the damning statistic that over 80% of those who buy this product fall apart. of him before death and surveys of real life doctors on this site and our facebook group show that the vast majority of those who have purchased whole life policies regret their purchase. If this is all new to you, please read everything you need to know about life insurance before continuing with this post.
Numbers are similar but slightly lower in the ongoing poll on this site (which, unlike the facebook group, allows those who sell these policies to vote).
A lot of people think I hate permanent life insurance. I don’t really hate the way it is sold and those who sell it inappropriately. if you really understand how it works and still want it, feel free to buy as many as you want. It doesn’t really affect me one way or the other. but I’m sick of running into readers and listeners who didn’t understand how it worked when they bought it, and once they understand it, they don’t want it.
how whole life insurance works
Whole life insurance can be set up in many different ways, but generally, you pay a monthly or annual premium for a defined period of time or until you die. the longer the period of time during which you pay the premiums, the lower the premiums will be. Every time you die, your beneficiary receives the proceeds from the policy. Since all whole life policies are guaranteed to pay if you keep them until your death, the premiums are much higher than for a comparable term life insurance policy.
A whole life insurance policy, like other types of permanent life insurance, is really a hybrid of insurance and investment. the policy accumulates cash value as the years go by. That cash value grows in a tax-sheltered way, and you can even borrow the money there tax-free (but not interest-free). Upon your death, whatever you borrowed (plus interest) is deducted from the death benefit and the rest is paid to your beneficiary. (You get either the cash value or the death benefit, not both.)
This aspect of investing allows those who sell whole life insurance to come up with all sorts of creative reasons why you should buy it and creative ways to structure it. More extreme advocates may even argue that you don’t need any other financial product for your entire life, since whole life insurance can apparently meet all your needs, including mortgages, consumer loans, insurance, investments, savings, etc. for college and retirement.
The problem is that for every use of whole life insurance, there’s usually a better way to deal with that financial problem. this post are the 38 common myths about whole life insurance propagated by its proponents.
Myth #1: Lifetime is great for pre-retirement income protection
Whole life insurance is not the best way to protect your income, term life insurance is. Before you retire, you can purchase affordable term life insurance to care for your loved ones in the event of an untimely death. A 30-year level-premium term life insurance policy with a face value of $1 million purchased on a healthy 30-year-old costs $680 per year. a similar whole life policy will cost more than 10 times as much, $8,000-$10,000 per year. that’s money that can’t be spent on mortgage payments or vacations, or invested for retirement.
Myth #2: Life is the best way to get a permanent death benefit
whole life is not the best way to get a permanent death benefit; universal life without guaranteed expiration is. there are a select few people who need or want an insurance policy that will pay at the time of their death, whenever possible. this can be useful for some unusual estate planning problems. however, there is a better product that offers this and it is much less expensive than whole life insurance. it is called guaranteed universal life insurance without expiration. it does not accumulate any cash value, but simply provides a death benefit for life. It’s only half as expensive as whole life insurance, so don’t be surprised to learn that the agent’s commission on this sale will be much less.
Call me cynical, but I suspect that might be one of the reasons you’ve never heard of universal life without guaranteed interruption. whole life insurance provides a guaranteed death benefit that is projected (but not guaranteed) to grow slowly, so that if you die in your life expectancy or later, you will leave a little more than the policy’s death benefit original.
death benefits and inflation
A whole life policy I recently reviewed projected the death benefit on a $1 million policy, purchased at age 30, to be $3.17 million when you die at age 83. that sounds great, almost like a hedge against death benefit inflation. except that historical inflation is something like 3.1%. at 3.1%, $1 million now would be the equivalent of $5.04 million over 53 years. A whole life policy would be devastated by unexpected inflation, as dividends are mostly backed by nominal bonds, the values of which would be killed in a high inflation environment.
Therefore, whole life insurance is not the best way to provide a nominal guaranteed lifetime death benefit or an actual guaranteed lifetime death benefit. So what’s the point? How about a guaranteed death benefit that could go up if the insurance company wants to go up? would you be willing to pay premiums twice as high for that? I don’t think so.
Myth #3: Permanent life insurance provides a great return on investment
all life is not the best way to invest; traditional investments are. When you pay premiums for your entire life, some of the money goes to purchase insurance, some goes to the insurance company’s overhead and profits, and some goes to the salesperson’s commission. the remainder goes toward the cash value portion of the policy.
Each year, the insurance company declares a dividend, and if there is $10,000 in the cash value portion and the dividend is 6%, then $600 is credited to your cash value. The dividend only applies to the cash value, not the full premium paid, so the average dividend rate is in no way related to the actual performance of the policy as an investment. in fact, the return on investment is generally negative for at least a decade. I recently reviewed a policy for a healthy 30-year-old man with a life expectancy of 53 years. Guaranteed return on cash value was less than 2% per year after 5 decades.
Even if you use the insurance company’s optimistic “projected” values, you still expect a return of less than 5%. in reality, you’ll probably end up with a 3% to 4% return. Considering you have to hold on to this “investment” for 5 decades, that doesn’t sound like much of a tradeoff. If you have decades to invest, it’s much smarter to take more risk with your investments and earn a higher return. An investment in stocks or real estate is likely to provide a return for decades in the 7% to 12% range. $100,000 invested for 50 years at 3% per year will convert to $438,000. if it grows at 9% instead, you’ll end up with $7.4 million, or 17 times as much money. The rate at which you compound your long-term investments is important, especially over long periods of time.
Myth #4: Insurance companies are great investors
Some agents believe that insurance companies can somehow get investment returns that you or I can’t find anywhere else and pass those big returns on to their policy owners. It can be enlightening to look under the hood and see what’s really in an insurance company’s portfolio. in 2016, insurance company assets were invested 67% in bonds (almost all in ordinary corporate and treasury bonds), 1% in preferred stock, 12% in common stock, 8% in mortgages, 1% in equity assets, 4% in cash, 2% in loans to the owners of their policies and about 5% in “other”. Thanks to the index fund revolution, an individual investor can buy almost all of that for less than 10 basis points per year in fees. active management works no better for insurance companies than it does for mutual funds.
Unsurprisingly, returns on a portfolio comprised primarily of Treasuries (currently yielding 1%-2%) and corporate bonds (currently yielding 3%-4%) are not particularly high. So where do the dividends come from? some comes from the return on the investment portfolio, some comes from the fees of those who surrendered their policies, and some comes from “mortality credits,” which is basically money they didn’t have to pay beneficiaries because fewer people died than they planned ( i.e. you paid too much for the insurance portion of the policy in the first place due to state regulations). There are no magic investments that insurance companies can invest in that you can’t without the company. each additional layer between you and the investment only increases expenses and reduces returns.
Myth #5: All of life is one great asset class
There are many asset classes worth including in a diversified portfolio, but all of life is not one of them. insurance salesmen usually resort to this argument once they realize they can’t convince you that all of life is a great investment in itself. They say that if you mix it into a portfolio of stocks, bonds, and real estate, it will improve the overall portfolio. however, you can call anything you want an asset class. Horse manure may be an asset class, but that doesn’t mean you should invest in it. think of it this way. If I told you that I have an asset class with the following characteristics:
- 50% front-loading the first year
- surrender sentences that last for years
- requires continuous contributions over decades
- difficult to rebalance with other asset classes
- backed by guarantees from a single company (and what you can get from a state guarantee association)
- requires you to pay interest to get your money
- guaranteed negative returns during the first decade
- poor performance even if you keep it for decades
- must be maintained for life to provide even a low return on investment
- excluded from investment due to health problems or dangerous hobbies
- negative performance guaranteed for years
- requirement to interact and pay a commission to an insurance agent
- requirement to provide samples of body fluids and undergo a medical examination
- requirement to answer annoying questions about my health
- requirement to avoid risky activities
- requirement to pay interest to use my own money
would you buy it? of course not.
Myth #6: Life is a great way to save on taxes
Whole life isn’t the best way to lower your investment tax bill, retirement accounts are. Many agents like to tout the tax benefits of whole life insurance, often comparing it to a 401(k) or Roth IRA. the cash value grows in a tax-sheltered manner, the cash value can be borrowed tax-free, and the policy proceeds at her death are free of income (although not estate) taxes. Which is why some whole life advocates suggest you use whole life insurance instead of a retirement account like a 401(k) or a Roth IRA. However, a 401(k) or Roth IRA not only provides more tax savings and allows you to invest in riskier investments that are likely to bring you a higher return, but you also don’t have to borrow your own money or pay interest. for the privilege of doing so.
I’ve previously posted about the 3 ways a 401(k) saves you taxes and how whole life insurance isn’t like a roth ira. I’ve also posted about how tax-efficient investing in a taxable investment account doesn’t carry nearly the tax burden that brokers like to tell you it does. Are there tax benefits of investing in life insurance? yes, but they are dramatically oversold.
Myth #7: Whole life insurance protects your money from creditors
Insurance agents love to use this method on doctors, who can become paranoid about asset protection issues. however, they often don’t mention (or maybe don’t even know) that asset protection laws are very state-specific. for example , in alabama, only $500 of the cash value of whole life insurance is protected from creditors, but 100% of the money in your 401(k) or ira is protected. West Virginia only offers $8,000 protection. south carolina protects $4,000. new hampshire does not provide any protection. Many states provide 100% cash value protection for permanent life insurance, but you should probably check your state-specific laws before falling for this myth.
Myth #8: It takes a lifetime for estate planning
Cash value life insurance has great estate planning features that can be very helpful. however, the vast majority of people, including doctors, do not need those features. The main benefit of life insurance is that you get a lot of cash free of income taxes at the time of your death. This can help with many liquidity problems, such as owning an expensive property or a private business. If you have two children that you want to share in your estate equally, and most of your estate is the family farm, they would either have to sell the farm, split it in half, or have one buy the other to share equally. however, if you also had a life insurance policy equal in value to the farm, one child could keep the farm and the other could get the insurance proceeds. Similarly, in the fortunate event that you have a very large estate (over $5 million for singles in the federal tax code, but can be much less in some states), life insurance proceeds can be used to pay estate taxes. this would be helpful even with a single heir to prevent you from selling a valuable property or business at fire-sale prices to pay the tax bill.
Some people also like to place life insurance in an irrevocable trust to reduce the size of their estate and avoid estate taxes. While you can put simple taxable investments in the trust (and would likely get away with it due to the higher returns), the trust’s tax rates can be quite high, putting a big drag on inefficient investment returns from the start. tax standpoint, not to mention the hassle factor. It’s important to note that it’s not life insurance that saves money on estate taxes, it’s the fact that you’re giving away your assets before you die by putting them in trust.
However, the fact is that the vast majority of Americans, even doctors, and even doctors with an “estate tax problem,” do not need whole life insurance for effective estate planning. most people will die without any estate tax burden. Of those whose estates will owe some estate taxes, the vast majority have liquid assets that can be used to pay the taxes. Even if you want to reduce the size of your estate to avoid estate taxes, you can easily do so without purchasing life insurance. you and your spouse can give $16,000 each  to any heir in a given year with no estate/gift tax implications. As an example, if you had 4 children and each one had 4 children and the 20 heirs were married, that’s 40 people. 40 x $16k x 2 = $1.28 million per year that can be taken out of your estate without paying inheritance/gift taxes. it won’t take long to get under the estate tax limit at that rate, no insurance needed.
Myth #9: Life is a great way to pay for college
Some agents even suggest using a whole life policy to pay for your children’s college. you can do this? of course. he simply takes out policy loans and sends that money to college to pay for tuition. But you’re better off saving for college using a good 529 for a number of reasons. First, you often get a state tax break by using a 529 that isn’t available for whole life insurance. Second, you don’t have to borrow money from your 529, you just withdraw it. no interest payments are required. Last, but certainly not least, consider the college savings time frame. parents typically save for college over a period of 5 to 20 years. By investing that money aggressively, they can expect a 7% to 10% return. whole life insurance has very low returns for periods of less than 20 years. in fact, many times the return on the cash value of your lifetime “investment” is negative for at least a decade. It’s important to make sure your money works as hard as you do, and that your money is on vacation for the first decade of a whole life policy. Whole life advocates will point out that if you die, the death benefit could still pay for college, but it’s much cheaper to cover that risk with term life insurance.
Myth #10: All of life is a luxury you desire
Insurance agents occasionally resort to this argument when it has been pointed out that a client really has no need for a permanent death benefit at all. they admit that the client does not really need whole life insurance. then they try to sell it based on having it as a symbol of status or luxury. “Of course, you don’t need it, it’s a luxury.” a luxury is by definition something you don’t need. I prefer my luxuries to be something I really enjoy. So before you buy whole life insurance as a luxury, ask yourself, “what do I really enjoy?” If you own whole life insurance, that’s fine, buy some. But I bet most of us would prefer a luxury like a nice car, a cruise with the grandkids, or maybe a donation to a favorite charity.
Myth #11: Whole life allows you to spend your other assets, providing valuable flexibility in retirement
A lifetime is not the best way to ensure you don’t run out of money, making some of your assets profitable is. Whole life is not the best way to deal with the second-to-die problem, properly structuring pensions and annuities is. Whole life agents like to come up with retirement scenarios that make you feel like you have to have or at least want to have permanent life insurance, especially for a married couple. for example, they will talk about a pension that only pays until the working spouse dies. or they will talk about making a part of their assets profitable based on the life of a single member of the couple. they will then suggest that the proceeds from the whole life policy be used for the living expenses of the second spouse who dies. there is no reason to use a whole life policy in this way. if you want your pension to last until you both die, select that option. if you want your annuity to last until you both die, choose that option. yes, it will pay at a slightly lower percentage, but the difference between the payments is less than the cost of a whole life insurance policy that would cover the loss of that pension. it’s just not the right solution to the problem. Does whole life insurance provide some flexibility in retirement? Sure, but the cost of that flexibility is too high.
Myth #12: All of life is a great way to buy expensive things
all life is not the best way to buy expensive things, but to save. there are some really creative insurance vendors advocating systems like bank yourself or infinity banking. The basic scheme is this: By structuring your policy properly with paid add-ons, you get a lot of cash value into your policy in the early years, so you break even in 3-4 years instead of 8-15 years. You also buy a policy that is “non-direct recognition.” This means that when you borrow from the policy, the insurance company continues to pay dividends on the amount that was there before you borrowed it, so the policy dividends essentially cancel the interest payments due on the loan. now, instead of going to your savings account or a bank to borrow money when you need a car, refrigerator or investment property, you borrow from your whole life policy at virtually no cost. Plus, the cash value of the policy you don’t borrow will grow faster than money in a savings account.
so what’s the problem? the problem is that you have to buy a whole life policy that you don’t need. You may break even sooner than you would with a traditional policy, but there are still several years of negative returns and, over the long term, the same low returns. is it better to earn 4%-5% a year after 5 years or earn 1% a year from year 1? well, for the first 6 or 7 years you’ll be better off with the 1% per annum savings account. Plus, if interest rates rise from their all-time lows, you’ll still be locked into this system for the rest of your life. It wasn’t that long ago that I was able to get more than 5% of a money market fund. It also seems to be very easy to finance a car at a dealership at extremely low interest rates. 0% or 1% are not uncommon. it is better to borrow from them at 1% than from your policy at 5%. it’s a similar problem with appliances and mortgages. you go to all this effort to be able to borrow from yourself, then you realize it’s cheaper to borrow from someone else. Finally, if you don’t need to make a purchase for 5 or 10 years, you have time to invest in something that is likely to have a much higher return than a whole life policy. Are self-betters being scammed? not necessarily, but they are usually oversold on the benefits of their scheme. Its proponents are primarily insurance agents looking to increase sales through creative marketing. saving is simply a better way to make big purchases than buying a whole life policy.
Myth #13: Very wealthy people or companies buy permanent life insurance, so you should too
Advocates of permanent life insurance, particularly those who advocate using their policy like a bank, like to point out that many very wealthy people and many businesses (including banks) purchase permanent life insurance. while true, it is irrelevant to the typical person. large companies don’t have access to the tax-saving retirement account options that a middle-class person has. ultra-rich people have already maxed out. when you have a lot more money than you might need, the return on your money doesn’t matter as much. Bill Gates can afford to invest in something that provides 2% to 5% returns because he doesn’t need his money to work very hard. that’s simply not true for the vast majority of upper- and middle-class people, including doctors. As discussed above, ultra-rich people also have more use of the limited estate planning benefits and asset protection benefits of permanent life insurance. In short, the low returns inherent in life are much less of a problem for them than they are for you.
Myth #14: You should shop for life when you’re young
Lifelong sellers like to point out that Lifetime is much cheaper if you buy it when you are young. while it is true that premiums are lower if you buy a policy at 25 than if you buy it at 55, once you take into account the time value of money and the fact that you will be paying premiums for an additional 3 decades , is no better investment at a young age than at an older age. actuaries are very smart people, and for a risk that is relatively easy to model, like death, they can quote insurance quite efficiently.
Besides the lower premiums, there are two other reasons why it seems best to buy it when you’re young. First, that fee is spread over more years, so it has less of an impact on your overall returns. but the alternative of not paying the commission at all is much more attractive. Second, you may become less healthy or take up dangerous sports later in life. This is one of the serious disadvantages of using life insurance as an investment: not everyone can use it. either they don’t qualify for it at all, or the price of insurance is so high that the returns on investment are even lower than they otherwise would be. I don’t see that as a reason to buy it when you’re young, I see it as a reason not to buy it at all. Can you imagine if Vanguard sent a paramedic to your house to draw blood before letting you buy their S&P 500 fund?
Myth #15: Waiver of premium riders is a good way to protect your retirement from your disability
Whole life insurance is not the best way to protect your retirement income from your disability, disability insurance is. Recognizing that whole life insurance premiums are indeed expensive and would be difficult to afford in the event of disability, insurance companies began offering a rider waiving premiums in the event of disability. sometimes you don’t even seem to have to pay extra for this benefit. those who fall for this tactic are missing a couple of points. First of all, guarantees are not free. every warranty costs you money in the form of a lower return, whether the insurance company charges extra for the warranty or “rolls it in” so it’s hidden.
Secondly, disability insurance is complicated and the definition of disability is very important. Most doctors who want disability coverage spend a lot of money getting a really good policy with a broad definition of disability, including “own occupation” coverage because they want to make sure the company has to pay in the event of your disability. riders sold in whole life policies are not as comprehensive and much less likely to be paid in the many gray areas that disabilities often fall into. you’ll almost certainly be better off buying a larger disability policy rather than a lifetime waiver of the premium rider. your disability insurance may also offer a retirement protection rider. While these also have problems (mainly in the way the benefit is paid), they are better than trying to get your disability insurance from a whole life policy.
If you’re planning an early retirement like I am, you may find that you don’t need your disability coverage to protect your retirement contributions anyway, at least after a few years of big savings. Consider having a portfolio of $750,000 at age 40. Estimate that you need $2 million in today’s dollars for retirement. he plans to save a lot so he can make it in his 50s and retire. what is the alternative plan if you become disabled and can’t save all that money? your disability insurance doesn’t just pay until age 50. Pay up to age 65. so you don’t need your portfolio to cover those 15 years. You can also start receiving Social Security payments when your disability payments run out. Since you don’t have to touch your wallet, it can keep growing. if it grows at 5% after inflation, by the time you turn 65 it will be worth more than $2.5 million in today’s dollars. don’t buy insurance you don’t need. But even before you have any kind of portfolio, the best way to protect your retirement savings is to buy more disability insurance, not try to get it from a whole life policy. Even if you could use the additional coverage to provide your retirement portfolio, you should be able to put it into an investment with a high return, which is unlikely to provide a lifetime. an aggressively invested taxable account is fine since your main income if you are disabled, your disability insurance benefits, are tax-free.
Myth #16: You should trade in your lousy whole life policy for a shiny new one
Because an agent gets a new commission every time they sell a new policy, even if it replaces an old one from the same company, they have a serious conflict of interest making recommendations to you. I interact with many insurance agents on this blog, and none of them agree with the others on what a “properly structured” whole life policy is. That means if you go to a second agent, they’ll almost certainly tell you there’s a better way to do it. however, for it to be worth trading one policy for another, the original policy has to be absolutely horrible, especially after a couple of decades. The reason for this is that the low returns on whole life insurance are concentrated in the early years. I took a look at a policy recently. this was constituted as an investment with additions paid during the first 25 years. it was the agent’s best attempt at maximizing policy returns. this is what the annualized returns looked like:
This shows that poor returns are highly concentrated in the early years. With this particular policy, the yields actually decline after 25 years because that’s when you stop making paid additions. with a more traditional policy, the third row would be slightly taller than the second row. But the moral of the story is that you have to buy the “right policy” first, and even a shoddy policy that is over 10 years old will be better than a newer, better policy. This is also why it may be a good idea to keep an older whole life policy, even if buying it in the first place was a mistake. It’s also noteworthy to see how little risk the insurance company is actually taking, as it doesn’t even guarantee that your cash value will keep up with inflation.
Myth #17: Life is the only way to pass money to heirs tax-free
whole life is not the only way to pass money to heirs, income tax-free upon your death. in fact it’s not even the best way, a roth rage is. When you die, your heirs get a death insurance benefit that is free of income taxes. what agents often fail to mention is that almost everything your heirs get from you when you die is tax-free. Thanks to the increased basis at death, anything outside of a retirement account, including furniture, cars, stocks, cash, mutual funds, and real estate, appreciates on the day you die. Since the basis is now the same as the value, no capital gains tax is due. Inheriting a retirement account may be even better, especially a Roth account that has already been taxed. you can withdraw all the money the same year you inherit it and not pay any taxes. Or, you can “stretch” it, gradually taking withdrawals over decades until it dies. meanwhile, it continues to grow tax-free. You can also stretch a tax-deferred legacy account, but you have to pay taxes on any money withdrawn from the account.
Myth #18: With all life, there is no way you can lose money
People invest in whole life insurance because they like guarantees. The insurance company guarantees that you will get a certain rate of growth on your investment and guarantees a death benefit. guarantees, however, are not worth as much as people often assume. For example, the guaranteed scale of any permanent life insurance policy guarantees that your money will grow more slowly than the historical rate of inflation, even though you’ve held it for half a century. Before you decide to trust a single company with your life savings, you may want to consider what happens if it goes out of business. There are state insurance guaranty associations that will cover the cash value and death benefit of your policy, but how much will they really cover? you’ll be surprised how little it is. in my state only $500k in death benefit and $200k in cash value is covered no matter how many policies you have. your status is probably similar. It’s no wonder agents always talk about the long-term viability of their insurance company. really matters! Now, I don’t think the risk of an insurance company going out of business in any given year is very high, nor do I think a typical buyer will end up with exactly the guaranteed rate of growth. But before you buy, you should realize that investing in permanent life insurance isn’t the risk-free proposition that agents like to present.
Myth #19: Life insurance shouldn’t be “rented”
This one is pretty easy to see, but you’ll still see agents using it frequently. since everyone “knows” that it is better to own a house than to rent it, the agent says something like “you wouldn’t rent your house for the rest of your life, would you? So why would you rent your life insurance? Basically, the agent is referring to the fact that if you use term insurance after age 60, it gets more and more expensive every year, just like renting a house. But unlike a house, you don’t need life insurance after you’re financially independent. when you only need a house for a year or two or three, it is better to rent than to buy. when you only need life insurance for a decade, two or three, it’s also better to “rent” than buy. the opportunity cost of “ownership” is simply too high.
Myth #20: Banks own life insurance, so you should too
This is one you often hear from the bank about yourself/the endless banking crowd. One basis of this school of thought is that greedy banks are taking over the world, so you should only do your financial work through reputable insurance companies. To be honest, I don’t have a huge distrust of any of these industries. Both industries have mutual ownership options (mutual life insurance and credit unions) where, at the forefront, customers own the business. Agents like to point out that banks actually hold permanent life insurance as part of their “tier one capital,” the money used to determine whether or not the bank is adequately capitalized. somehow this is to make you fear that the banks know something you don’t, as if the financial world is about to implode and anyone who uses banks instead of insurance companies for their financial needs will go bankrupt. Tier 1 capital is a measure of a bank’s financial strength. banks use less than 25% of their tier one capital to purchase single-premium or universal life insurance for a group of employees. the bank owns the policy and is the beneficiary. when the employee collapses, the bank receives the cash. the bank is buying the policy primarily for the death benefit, not because the yield is particularly high.
tier 1 capital is highly regulated and it is difficult for a bank to include higher risk assets such as common stocks (apart from the bank’s, which makes up the majority of tier one capital) and reits in its equity capital. first level. When you’re stuck choosing between low risk/low return investments, then you can understand why a bank might consider something like cash value life insurance with some of that money. however, individual medical investors investing for retirement are less restricted in their retirement investment options. most of them are in dire need of their retirement money to grow. The returns available with cash value life insurance are generally not high enough for them to achieve their goals. Still, consider what a bank does with most of its blue chip capital: It buys the only shares it can, its own. If whole life insurance was that amazing, you’d think the bank would use all of its top-tier reserves to buy it. In short, doctors are not banks, so doing what banks do is not necessarily smart. Tier 1 capital is highly regulated and it is difficult for a bank to include higher risk assets such as common stock.
Myth #21: Corporate CEOs have whole life insurance, so you should too
Agents, particularly the bank type, love to point out that the golden parachutes for many well-paid CEOs include cash-value life insurance policies. however, just as the financial situation of a bank is different from that of a doctor, the financial situation of a CEO earning $10 million a year is different from that of a doctor. When you make billions of dollars a year, the rate of return on your money becomes much less important, and therefore the lifetime benefits (asset protection, taxes, estate planning, etc.) become relatively unimportant. more important. it’s not that lifetime returns magically improve. Again, if you find yourself in a position where you only need your long-term money to grow a nominal 3% to 5% per year, don’t hesitate to invest in permanent life insurance. most of us, however, need more growth. Remember that a doctor making $200,000 a year and a CEO making $10 million a year are in very different financial circumstances, and what works for one won’t necessarily work for the other.
Myth #22: Banks went bust during the Great Depression, but insurance companies didn’t
This myth again plays on fears of a global economic collapse. in 1933 there were two holidays. the first was a “banking holiday” in which banks were closed for 10 days while sweeping regulatory changes took place. the second was an “insurance vacation” in which for a period of nearly six months you were unable to redeem or borrow against your cash value life insurance policies for cash. Aside from this holiday, 14% (63 companies) of life insurance companies went bankrupt during the great depression. in fact, if they had marketed the bonds and mortgages they held, they would all have been insolvent. Reforms were implemented during the great depression that fixed many of the problems that led to bank failures and bank holidays. however, these reforms were never implemented for insurance companies.
Myth #23: After-tax lifetime yields are better than bond yields
this is usually the case. “If you can buy a bond with a 5% yield and it’s in the 45% marginal tax bracket, the after-tax yield is only 2.75%. a whole life policy with a “tax-free” internal rate of return of 5% is better.” this is a comparison of apples to oranges. what is the 1 year yield on that whole life policy? 2.75% sounds much better to me than -50%. even 10 or 20 years down the line, the bond is still way ahead.
I wrote about a doctor who was pleased with his 7% return on his whole life policy purchased in 1983 (don’t expect to see that again any time soon). Except he could have bought a 30-year Treasury bond that year at a 10.5% yield. 10 years later, as his whole life policy is breaking even and interest rates have dropped, the bond buyer has not only more than doubled his money from the coupon payments alone, but the capital gains of that bonus they added another 50% to their return. . That investor would have done even better buying stocks in 1983, the start of an 18-year bull market. A bond, which can be sold any day the market is open, simply cannot be fairly compared to an insurance policy that must be held for life to earn a decent return. Plus, most medical investors can hold taxable bonds within retirement accounts instead of a taxable account anyway. That retirement account not only provides tax-protected growth like a whole life policy, but also tax rate arbitrage between your marginal rate at contribution and your effective rate at retirement, further increasing yields.
Even if your only choice is between buying bonds in a taxable account and buying whole life insurance, keep in mind that even with today’s low interest rates, you can still buy the long-term municipal fund tax-free from vanguard with a yield of 3.17%  . the guaranteed return on the cash value of whole life insurance, held to your life expectancy, is about 2% and the projected return is only ~5%. Realistically, you should probably expect a 3% to 4% long-term return on that policy. Of course, if you really want to cash in on that policy rather than borrow from it (and pay interest for the right to borrow your own money), the proceeds are just as taxable as any taxable bond fund. And if you want your money in just 10 to 20 years, you’ll be far behind on life insurance.
Now, if you really understand how permanent life insurance works and believe that its unique features outweigh its significant drawbacks, then feel free to run out and buy whatever you want. it really doesn’t bother me. I don’t earn money if you buy all your life, or if you decide to buy something else. however, if you’re like most, once you understand it, you won’t buy it, and in fact, if you already have, you’ll probably be looking for the best way out of whole life insurance. don’t feel bad 80% of those who buy these policies deliver them before they die, 36% in just five years. You have to wonder why so many people who had apparently intended to keep this product for the next 40 or 50 years suddenly changed their minds. I’m sure it has nothing to do with insurance agents facing a terrible financial conflict of interest with their clients inappropriately selling it to financially unsophisticated people. whole life insurance is a product made to be sold, not bought. it is a solution that looks for a problem that exists for very few, if any.
Myth #24: Permanent life insurance keeps assets off the fafsa
this is just misleading. the statement as it stands is true. the free application for federal student aid (fafsa) does not consider the cash value of whole life insurance as an asset of the student or parent. the problem is, for the typical reader of this blog, it doesn’t matter. your income alone will prevent your child from qualifying for any need-based college financial aid. Therefore, if he buys a whole life policy for this reason, he is likely to be disappointed.
Myth #25: Term life insurance expires without paying anything
another misleading argument. I’m always surprised to see people fall into this line, but they do. Do you complain when you can’t use your car insurance for a certain period of six months? What if your house doesn’t burn down? or you don’t get cancer and you can use your health insurance? So why on earth would you complain that your term life insurance expires and you’re still alive? term life insurance is pure insurance. if you die, pay. if you live, no. As a general rule of thumb, since insurance should cost more on average than it pays (as insurance companies have both expenses and profits), you should insure against financial catastrophes. When it comes to death, financial catastrophe is dying during your earning years, before you become financially independent. so that’s the only time period you need to insure against. Some people only fall for this argument and buy return-of-premium term life insurance. the same principle applies, of course. You don’t walk away empty-handed when your term life policy expires. I had insurance for the entire period, which is exactly what I needed.
Myth #26: Whole life insurance is the perfect investment
This blatant lie comes from true believers. They argue that whole life insurance is safe, liquid, tax-advantaged, creditor-proof, and offers a competitive return. These half-truths add up to one big lie. let’s take them one at a time:
maybe safe from the cash value going down, but not from losing money. A large percentage of whole life insurance buyers lose money because they cancel the policy sometime in the first 5 to 15 years before they break even on their “investment.”
I guess it’s more liquid than owning a website or rental property, but it pales in comparison to the liquidity available in a savings account or mutual fund that can be liquidated any day the market is open. even within retirement accounts, there is absolute liquidity after age 59½, and fair liquidity even before that date. Most of the time with whole life insurance you don’t even get your money, you just have the right to borrow against it on pre-set terms. you can achieve that with a heloc.
#3 with tax advantages
Few understand just how small the tax advantages of whole life insurance are. there is no initial deduction like a 401(k). Unlike a real investment, there are no capital gains fees if you surrender a policy at a profit, and you can’t deduct the loss if you surrender it at a loss (the usual case). You can’t use depreciation to reduce the tax burden on your income like you can with real estate. Instead of being able to withdraw the money tax-free like with a Roth anger, you can only borrow against the policy, and that’s tax-free but not interest-free, just like borrowing against your home, car, or wallet. mutual. Sure, you don’t pay taxes on the “dividends,” but that’s because they’re actually a return on premium (ie, you paid too much for insurance). The only real tax break associated with life insurance is that the death benefit is tax-free. but that’s no different than any other investment, where you get the base increase on death. furthermore, all of life cannot be stretched out like an anger. tax benefits, such as they are, are limited to a single generation.
Very few doctors understand how low the risk of needing this protection really is. I calculate my risk of being sued successfully for an amount in excess of the policy limits at 1 in 10,000 per year. maybe half now that I’m practicing halftime. So if I were unlucky enough to be that person, I would file for bankruptcy and be left with only the protected assets. in my state, it’s my retirement accounts, my spouse’s assets, $40,000 in home equity, and the cash value of permanent life insurance. Your state may or may not protect the cash value of whole life insurance. see if you’re paranoid enough to buy whole life insurance for this reason.
competitive return #5
Are you kidding me? competitive with what? Whole life insurance typically has a negative return for 5 to 15 years (sometimes 30+ for really terrible policies). even a good policy held for more than 5 decades is only guaranteed to return 2% and projects a return of 5%.
If I had to design the perfect investment, I would definitely avoid the following features of whole life insurance
only qualifies as an “acceptable” investment in certain very limited situations. it’s not even close to perfect.
Myth #27: Insurance agents are just people
This is one of my favorites to watch in any conversation with an insurance agent about the merits of permanent life insurance. usually comes when I point out that my problem with whole life insurance is not so much the product as the way it is sold. obviously many of them take it personally as they have dedicated their lives and careers to improperly selling this product. then they point out that there are bad doctors or that insurance agents are just people trying to make a living. I don’t have a problem with the sales profession. I don’t even have a problem with people who make commissions selling things. Cindy gets paid a commission for selling ads right here at White Coat Investor. But if you’re looking for Cindy’s advice on whether buying an ad on the White Coat Investor is a good idea for you, you’re a fool. insurance agents are just people and people respond to incentives. an insurance agent has a strong incentive to sell you a whole life policy. the commission of a policy is from 50% to 110% of the first year’s premium. Now you know why he’s trying so hard to sell you a big, fat doctor’s policy.
Myth #28: No Income 1099 With Life
This was new to me. I thought I had heard every possible argument for buying a whole life policy until someone brought this up. How much of a problem is it for you to deal with a 1099? it takes me about 30 seconds using turbotax. certainly not a reason to favor one investment over another. remember not to let the tax tail wag the investment dog. his goal is not to minimize his taxes or maximize his tax-free income. is having the most money after paying any taxes due.
Myth #29: What does the white coat investor know? he’s just a doctor, and probably a shitty one
Agents sometimes start with this argument, but they often end there, with ad hominem attacks. sometimes expressed as one of these:
So, how exactly does being an ER doctor qualify you to provide financial and insurance-related advice?
Do everyone a favor and continue studying medicine.
You are young, a doctor, and absolutely certain that you know everything.
Obviously, medicine has a lot of problems and doctors don’t know everything, but if the agent’s best argument for whole life insurance is an ad hominem attack, that’s a good sign you should have gotten up and gone. for a long time. does.
Myth #30: After maxing out a 401(k) and a Roth IRA, isn’t permanent life insurance the only tax-sheltered option left?
This is the wrong question, but the answer is still no. Just because it’s the only option presented to you by an insurance agent doesn’t mean it’s the only option. other retirement savings options include defined benefit/cash balance plans, an individual 401(k) for self-employment income, a spousal roth ira account, accounts provided by your spouse’s employer, and savings accounts for health (hsas). In some ways, doing Roth conversions and paying down debt is also tax-sheltered. But more importantly, there is no limit to investing in a nonqualified mutual fund account (where long-term earnings and qualified dividends are somewhat shielded from taxes) or real estate (where income is protected from depreciation). and capital gains can be deferred indefinitely by exchanging).
Obviously, investing in permanent life insurance compares better to investing in a taxable account than a retirement account (where there is no comparison from a tax, investment, or, in most states, asset protection). But the real problem with this argument is that it focuses entirely on the idea that any tax-advantaged investment is always better than any fully taxable investment. that’s just not true. it also confuses the idea of an investment and an account, two things that financially naive doctors sometimes have a hard time telling the difference. (Think of accounts as different types of luggage and investments as different types of clothing.) The real question to ask yourself when you hear this argument is “where should I invest after I exhaust my available retirement accounts?” the answer is a non-qualified, taxable account. Now you are left with the question of which long-term investment to invest in: tax-efficient mutual funds, real estate, or whole life insurance. it’s pretty hard to really compare the merits of those three investments and end up choosing whole life insurance given its limitations and terrible returns discussed above.
Myth #31: Estate tax exemption could decrease
See also: Orthodontics | AXA Health
The idea behind this argument is a rebuttal to the argument discussed in myth #8. In short, that argument is that you need a lifetime to avoid estate taxes, which is nonsense given that the vast majority of doctors won’t owe any federal estate taxes. the next step is for the agent to argue “well, the estate tax exemption could be reduced”. Well I guess that’s true. Congress can change any law it wants at any time it wants. but buying insurance or investing based on what might happen seems reckless. I mean, it’s probably just as likely that the estate tax will be eliminated as the exemption will be reduced. It seems to me that the best way to plan for the future is to project current law into the future, since most laws will not change significantly. if they are, you can make changes at that point. In any case, it’s not like whole life insurance is a magic bullet for eliminating estate taxes. The only reason whole life insurance lowers your estate taxes is because it makes sure you have less money because of its low yields! What reduces the size of your estate is the irrevocable trust you put the insurance into, and you don’t even have to if you don’t want to.
Myth #32: Whole life insurance protects against nursing home creditors
This was particularly fun to debunk. Apparently, the idea here is to not pay for your own nursing home care by buying whole life insurance instead of mutual funds. I’m not sure exactly how those envisioning this process think it will go. maybe they think the nursing home doesn’t ask for money until after you die or something, which is, of course, completely silly. but i think what they’re referring to is the ability to spend your assets at medicaid levels, get medicaid to pay for nursing home and still be able to leave a large inheritance to your heirs because medicaid somehow doesn’t look at the value of your whole life insurance.
to be honest, the whole medicaid planning process is a bit unpleasant for me. the idea is to hide someone’s assets from the state so that heirs can have them, foisting on the public the cost of caring for the owner of those assets. but even assuming you don’t have any ethical issues doing this, it’s unlikely to work very well. Medicaid is a state law, so it varies by state, but in Utah, a person can have up to $2,000 in countable assets and still qualify for Medicaid. above that level, there is no medicaid until you spend up to that level. if there is a spouse, the spouse can keep 100% of the assets up to $24,720 and 50% of the assets up to $123,600. on top of that, medicaid will not pay for the nursing home. non-counting assets in utah include:
- your home if your spouse lives in it
- the value of a vehicle (including one tesla)
- funds set aside for a funeral
- personal and household items
- Cash value of your life insurance policies if the total face value of all policies is < $1500
- the average retired adult who dies at age 60 leaves behind $296k in net wealth,
- $313k in your 70’s, $315k in your 80’s
- $283k in his 90s
so i guess if you want to stash medicaid money in utah then you could go buy a $1,000 whole life policy. Most states have similar policies regarding cash value life insurance. Even if there was a state with a higher limit than Utah, this seems silly for someone who should spend her entire retirement as a billionaire making plans to spend up to Medicaid levels for nursing home care. A much better plan for scamming your fellow Utah taxpayer (assuming she has a spouse who doesn’t need care) is to upgrade her house and car.
Myth #33: wci doesn’t understand the opportunity cost of borrowing against whole life insurance and investing elsewhere
This statement has been made without explanation, but the idea is not that complicated (or misunderstood by wci). you can borrow against the cash value of your whole life policy and use that money for whatever you want. you can spend it or you can invest it. many lifelong fans use funny phrases like “speed of money” to describe buying a whole life policy, borrowing the money, and investing it elsewhere. really talented salespeople get you to invest it (along with the home equity they can get you to borrow) in yet another insurance product.
Is there a cost to not making the most of your life this way? Sure, anytime you can borrow at a lower rate and earn at a higher rate, you’ll come out ahead. but leverage works both ways and the risk is not insignificant. What is often not mentioned by advocates of doing this is the opportunity cost of investing money in a low-yielding life insurance policy and buying an unnecessary death benefit instead of a higher-yielding investment. For example, consider two options. You can invest $10k a year in an investment that returns 10% per year or you can buy a whole life policy that won’t break even for 10 years. after 10 years, the first investment is worth $175k and the whole life policy only has a cash value of $100k. that’s a $75,000 opportunity cost that the “insurance agent doesn’t seem to understand.”
With a properly structured policy, you can break even in perhaps five years (maximizing the use of paid additions) and using the laundered loan mix (interest rate to borrow against the policy = dividend rate of the policy) and a policy of non-direct recognition, this idea becomes “not terrible”. You still have the opportunity cost of the first few years in the policy, but that is balanced by a higher return on your cash in later years. I’ve discussed “bank in yourself” or “infinity banking” above in detail if you’re interested. It’s not an insane use of whole life insurance, but it’s not for me. if you really understand how it works (it will take a lot of work to do) and you want to do it, go for it.
Myth #34: Buy whole life insurance for the long-term care rider
In recent years, insurance companies are adding a long-term care clause to whole life insurance policies (and universal life policies and annuities) and agents are using fear of costly long-term care to long term to sell them. I find this appalling. Not only are you mixing insurance and investments, you are now combining two different types of insurance policies with investments. Given the history of insurance companies with long term care, I think most of my readers should strive to find a place where they can self-insure against long term care risk, but even if they can’t, I’d prefer a simpler long term care policy alone than mixing it with an expensive and unnecessary insurance policy.
the benefit of buying this as a rider to a whole life policy is that the policy premiums are guaranteed – you don’t run the risk of the insurer raising your premiums like they do with a long term care policy or it increases the cost of the underlying insurance as it does with a universal life policy. those guarantees are worth something.
Remember, we’re not just talking about an accelerated death benefit. This is just another way to self-insure long-term care, but with a lower return on the investments used to pay for it. you are actually buying two combined policies in one. but there is no free lunch here. either you are paying more for the combined policy, or you are receiving less of something, usually the death benefit. Chances are, you’re also paying for a life insurance policy you don’t need or wouldn’t otherwise buy. that death benefit is not free. The reason life insurance companies stopped selling long-term care insurance and started selling these hybrid policies is that their actuaries were convinced that they were more likely to make money that way. that profit has to come from you, there is no other possible source.
If you decide you want to buy some type of long-term care insurance policy, a hybrid product may well be right for you, but like health and disability insurance, the devil is in the details. read the fine print and make sure you know what guarantees the insurance company really offers. know what is covered, what is not covered, and whether benefits are indexed for inflation or capped. or better yet, live as a resident for 2-5 years outside of the residence so that you are wealthy enough to self-insure against this risk and never have to make this decision.
Myth #35: We’re not saying put all your money into whole life insurance
This argument is just weird, but it’s used by agents once the prospective buyer has refused to buy the bulk policy they were initially offered. A little commission is better than no commission I guess. Of course, you shouldn’t put all your money into whole life insurance, that’s a straw man argument. Besides, if buying a policy is a bad idea, he’d be better off buying a small one than a large one. but that’s not a reason to buy a policy in the first place. Like any asset class, if it’s not a good idea to put a significant portion of your portfolio into it, it’s probably not a good idea to put any of your money into it.
Myth #36: Yes, we have some bad eggs, but most of us are ethical
This argument is used when I point out that literally hundreds or even thousands of my readers have been sold clearly inappropriate insurance policies. the problem is that there are two options to explain this phenomenon. The first is that these agents are unethical. the second is that they are incompetent. Given the statistic that 80% of policies are surrendered before death and 76% of docs I’ve surveyed regret their purchase, it’s not just “some bad eggs” doing this. it’s an industry-wide problem.
Myth #37: You must buy insurance to preserve insurability
This is used to sell insurance to people who don’t even need insurance. the idea is to play on your fear of the combined risk of needing insurance and not being able to buy it. An example would be a 25-year-old single physician with no children. no need for life insurance here. “But what if you get diabetes before you get married and have kids? you should buy the policy now.” uhhhh. .no.
first, you may never have any dependents.
second, if you need it, you can probably buy it right away for a reasonable price.
Third, if you become less insurable, you may still have options for some insurance through an employer or other groups.
Fourth, even if you can’t insure yourself through someone, the risks have to be multiplied. For example, let’s say there is a 5% risk that you won’t be able to insure yourself before you have a real need for insurance. and the risk that he will die before reaching financial independence is 5%. To get your true risk of a financial catastrophe, you need to multiply those risks. 5% x 5% = 0.25%. That’s a 1 in 400 chance. Life is risky. You can’t eliminate every chance of something bad happening to you and even if you could, it wouldn’t be a wise use of your money. wait to buy insurance until you have a need for that insurance.
This argument is often extended even to children. If you’re buying life insurance from the same company that sells you baby food, you’re probably doing something wrong. Now, if you could buy a lot of future insurability for that child very, very cheaply, that might be something to consider. unfortunately, you can’t do that for several reasons:
first, you should buy insurance you don’t need. that newborn probably won’t need any life insurance for 25 to 30 years.
Second, you’re not buying in advance the policy that child will need. you cannot purchase the right to purchase a 30-year level term policy at age 30. you have to buy a whole life insurance policy. which means you are also paying for insurance that will also be unnecessary at the other end of life, after the child has become financially independent.
Third, you generally can’t buy enough insurance, or even enough future insurability, to meet any type of realistic life insurance need. most of these baby policies are only $10k or so. that’s basically a burial policy, and while it would be sad to bury your child, it’s not a financial risk my readers need to insure against. (I’ve even heard the argument that you should buy the policy so you can take a few months off work because you’ll be too distraught to work, but that’s what an emergency fund is for.) even if you find a policy that allows you to buy future insurability for a larger policy, say $500k, that won’t mean much in 30 years when the need for life insurance really first appears, much less in 50 years when the child it is reasonably likely to die. At 3% inflation, $500,000 today will be worth only $200,000 in 30 years and $109,000 in 50 years. better than nothing, but you went to all this effort and expense to preserve insurability and your child ended up with inadequate life insurance coverage.
Myth #38: Permanent life insurance is a great investment for your DB plan/cash balance
This was introduced to me by a doctor turned financial advisor from around the world. the argument was that he could buy whole life insurance with pre-tax dollars and then if he wanted to take the policy out of the defined benefit plan, he could do so. he felt that it was an “advanced technique” for “high net worth people”. I was dumbfounded. It was such a stupid idea that I couldn’t believe it. a defined benefit/cash balance plan already provides tax-protected growth and asset protection, two oft-cited reasons for purchasing whole life insurance. now you are paying double for those benefits. To make matters worse, if you die while this policy is in the defined benefit plan, part of the death benefit becomes taxable, negating another common life insurance benefit: a completely tax-free death benefit. but the main reason this is such a stupid idea is when it comes time to close the defined benefit plan which is usually done every 5-10 years or so to turn it into an ira. at that point, you have to do one of two things.
First, you can surrender the policy and move the cash surrender value to the IRA. but what is the return on investment in the first 5 to 10 years of a whole life policy? you break even if you’re lucky. not exactly a great investment for that time period, especially compared to a typical conservative mix of stocks and bonds.
Second, you can purchase the plan’s policy. of course, you have to do it with after-tax dollars. So even though you initially bought it with the pre-tax dollars in the plan, you’ll eventually have to shell out after-tax dollars for the policy. and then what are you left with? a whole life policy that you probably don’t want or need and maybe even with associated premiums that you have to make every year. some deal!
Myth #39: More money is transferred through life insurance
This myth appeared in a comment on a post on this blog. I thought it was particularly creative, especially the way it was combined with myth #8 (it takes a lifetime to help with estate planning) and myth #25 (term of life expires without paying anything ):
More money is transferred through life insurance than any other way. I’ve seen too many live term people who are throwing money away and need life insurance and at that point in life they are uninsurable. life is used really well in estate and trust planning.
Surprisingly, this was the first time I heard this argument. being financially savvy, of course I was able to immediately discredit him, but I suppose someone could fall for it. There are two problems with this statement. it may not even be true in the first place. I searched and searched and searched for a study that showed what assets are really inherited, without finding anything that really quantified it. so if there is a study that actually says this, I suspect it is paid for by a life insurance company. Maybe it’s true, maybe it’s not, but I suspect it’s not true for the few people who have life insurance in force at the time of their death. I suspect that more money is left in houses than in anything else. I mean, look at people’s net worth by age. among retirees, the 50th percentile of net worth is $210k. that has to be mainly home. the 80th percentile is $696k. that’s the median price of a home in my upper-middle-class neighborhood in an elevated state.
which is consistent with the average estate remaining at death:
It seems very unlikely that the main inheritance that most people receive is the product of a life insurance policy given these figures. How many retirees even have life insurance? according to this, about 65% of those over 65. but 47% of them have less than $100k of life insurance. It’s a well-known statistic that pays less than 1% of term life insurance policies. It’s not that insurance companies aren’t good for the money, it’s just that people live by the term. a lesser known statistic is that 80%-90% of whole life insurance policies also don’t pay out. are surrendered before death, often at a loss as 1/3 of policies are surrendered in the first 5 years and more than half in the first 10 years.
However, I did manage to find some data from the UK, which suggests that my hunch (that people inherit more in real estate than life insurance proceeds) is correct.
As you can see, more than half of inherited assets are home assets, so clearly you can’t pass more assets as life insurance than anything else.
perhaps the agent wasn’t referring to median inheritance. perhaps he was referring to the total amount of dollars passed to the heirs. I couldn’t find any data to support or refute that notion.
second, even if the statement is true, it’s irrelevant. Since the purpose of life insurance is to pass assets on to heirs, that is not an argument for buying life insurance for any reason other than the death benefit. As I’ve always said, if you want a lifetime death benefit that gradually increases throughout your life, then a whole life insurance policy is a great way to get it (although a guaranteed universal life policy may provide a leveled lifetime death benefit at about half the price and is probably a better solution for those who really need a permanent death benefit). Keep in mind that you’re likely to leave a larger inheritance by investing in stocks and real estate than by buying life insurance because of the higher yields. , and those assets, like life insurance, provide a tax-free inheritance to your heirs. life insurance only provides a larger inheritance if you die well before your life expectancy.
Myth #40: You get an investment and life insurance
This confuses a lot of people and they get very upset when they find out how whole life insurance works. They mistakenly believe they get a death benefit for their heirs and a separate “cash value” investment account that they can use themselves or leave to their heirs. What they don’t realize is that these two pots of money are one and the same. what you use for yourself does not pass to your heirs. when they discover this fact, they feel that the insurance company is stealing a lot of money from them and their heirs.
Actually, when you borrow against your life insurance policy, you’re borrowing against your death benefit. When you die, your heirs will get the death benefit minus any outstanding loans. The amount of outstanding loans, of course, can never be more than the policy’s cash surrender value, which gradually grows to an amount very close to the death benefit over your life expectancy. so really the cash value just tells you how much of the death benefit you can borrow at any one time. you can borrow this money (death benefit/cash value/surrender value) and spend it yourself, surrender the policy and spend the money, die and leave the money to your heirs, or some combination of the above. but there are not two pots of money. there is no $400k cash value and $1 million death benefit. there is only a $1 million death benefit. if you spend $400k, your heirs only get $600k. so you don’t get investment and life insurance, you get investment or life insurance.
There you have it. Forty reasons to buy whole life insurance debunked. don’t worry; the agents selling these things will come up with more. just hang out in the comments section for the next year or two and you’ll be able to watch it. whole life insurance is a product designed to be sold, not bought, and the only way to win an argument with an agent trying to sell it to you is to stand up and walk away. As Upton Sinclair said, “It’s hard to get a man to understand something when his salary depends on his not understanding it.” maybe it should be called complete lie insurance.
Whole life insurance is a terrible investment if you don’t keep it until you die. Since the vast majority of people surrender their policies before they die, it’s a terrible investment for the vast majority of buyers. if you want to invest in it, you should place a very high value on its unique aspects and not worry about its severe drawbacks.
The ideal buyer of whole life insurance should:
- need or want a guaranteed lifetime death benefit, but may increase slowly,
- you understand that the guarantee/contract essentially depends on the insurance company remaining in business for as long as you live for any reasonably sized policy,
- live in a state that protects 100% of the cash value from creditors,
- has some estate planning cash flow issues,
- enjoy excellent health,
- do not pursue dangerous hobbies,
- You don’t mind low returns on your investment despite holding it for decades,
- has a serious philosophical aversion to using traditional financial resources, such as banks and credit unions (or simply saving for what you want to buy),
- have already maxed out all available retirement accounts, including backdoor roth ira and hsas accounts, and
- be willing to keep the policy until death regardless of changes in your financial life in the future.
The fact is that only a small percentage of the population, much less than the number of people to whom these policies have historically been sold, meet all or even most of these criteria. whole life insurance is still a product designed to be sold, not bought.
okay? disagree? comment below! mention what “myth” you are referring to in your comment and keep comments civil and on topic. ad hominem attacks will be eliminated.
[This updated post was originally published as a series between 2013 and 2019.]
See also: What Is an Insurance Claim? – Experian