why whole life insurance is a bad investment

Things like bonds, savings accounts, and CDs. (as long as you don’t go into the death benefit). 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. You mention the “tax-free” nature of whole life policies, which again is something I addressed in the posts. Whole life is one way to do that. In that situation, the policy can provide reasonable, conservative returns over an extended period of time, while also providing your family with a death benefit if you happen to die early. Could I really produce that protection for her with liquidity via investing for only $120 per year? It is good that you can borrow from the cash value because you will need to at times to make ends meet. 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. 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. Why are there so many articles against whole life insurance instead of term? 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. Thanks for reaching out Wanda. Okay- so I fell for it. The same applies to the market if you dont know how to analyze and invest. My FA has recommended WLI (along with TLI) and I’m having a hard time seeing the value. 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. Thanks for the question Gary. What I meant was that the value to other family members is immeasurable. It disappears magically. You and your brother should have simply received the face amount of the life insurance policy. 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. I have paid so much money into them only to realized that I has nothing to hold onto. 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. 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, Life insurance is treated “First in; First Out” for accounting and tax purposes. There is plenty of risk that the actual performance will be worse than what is shown during the sales process. That is unfortunate, because once properly understood and used, it is a great tool. 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. When there is only small amounts of money, what can a person do? Whole Life Insurance and any kind of Cash (Trash Value) Insurance is a Rip Off! But there are definitely cases for business owners, high net worth clients and incorporated professions where benefits can be derived. So it’d be best for us to max out the other tax-advantaged accounts before considering whole life? 18 months ago Fidelity Life Ins. 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. Understanding the difference is important. 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. 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. 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. How would TLI or other assets not cover that? 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. Neither do I, which is why I didn’t give any concrete advice in my initial response. Thanks for the thoughtful comment Dan. All of this being said; putting large amounts of money into WL policies is foolish unless you have maxed out other strategies. They themselves do not understand. It sounds like you’ve got a great start no matter what. The right I agree with a lot of what I have seen up here, both by you and other commenters. Of course, no one will insure her now! I have a ROTH that is up 11% YTD with Scottrade. 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.). he wouldn’t break even), that should be taken in context of the way whole life cash values are usually structured. No problem! A 30-year-old attorney who makes $200,000 and maxes out his 401(k). Next month you have an emergency an ,you kneed $25.0/0. also what do you see in universal life as well ? I am 57 years old. 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). 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. 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.) But understanding where your money is going is an important part of making smart decisions as a consumer. 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. The benefits of the cash value component are made to sound very attractive, particularly as a retirement planning tool. I pay $50.00 a month for that. If you can increase that monthly contribution to $34.25, you’ll reach just over $10,000 by age 70. It’s also true that individual investors typically get significantly worse returns than the funds they invest in. Buy more term at your current health at 51? 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. 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. Given that you’re closer to retirement than my typical client, I would try to find one through NAPFA or Garrett Planning Network. You’re welcome to schedule a time here: https://momanddadmoney.com/consult. One thing to point out is the product presented was a very interesting variation of whole life insurance. Otherwise, the policy would lapse. So it was not a “bad policy”. 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? I’ll simply refer you to that section to see my thoughts. Why Whole life Insurance is a very bad investment/retirement vehicle. 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. 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. Some have lost in insurance products from cashing out, lapsing or being sold an incorrect product. Ok, so some companies might be marginally cheaper, but I literally just got this quote for Whole Life. Hey Amy. 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? His comments are just wrong on so many levels, it would take a book to refute them. True whole life policies have set premiums, not increasing. to keep the two separate. How could you NOT want life insurance as you age? It takes 10 minutes to set an allocation and if an investor can stomach the volatility, they need to let it do its thing. Of course, the other way to get that death benefit is with term insurance. As well, buy some permanent coverage to at least pay for final expenses. Also, the case study you reference is interesting for several reasons. Thank you. The key points of this product were: 1. 1 + 2. 401(k) gets taxed as income, investment accounts pay capital gains tax, and life insurance is distributed tax free. I hope that helps! 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. The idea of a fixed investment with stable returns in the distribution phase of retirement is important to me. This is totally wrong!!! 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. You are guaranteed a minimum 0.75% interest with a 15% cap. That’s a contractually guaranteed – total cost for that $150,000 guarantees death benefit . Whole life insurance can help with that. this is a very interesting article. So it is a much less risky investment than almost anything other than cash. 3. 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. Good luck with everything and let me know if you have any more questions as you move along. 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. Please explain how a whole life policy can expose one to both negative returns and tax consequences if cashed out ? I am 50 and have a $10,000 term policy which expires at age 70. How about taking whole life insurance of say, 250K for a baby. Are you interested in a rate of return? I would look again at the “results are not guaranteed” part of this article. 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. It makes term insurance a lot more expensive. You can enter the policy year in one column of your excel, and the corresponding cash flow in the column right next to it. 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. 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. You sort of have to dig for the truth. So here is another free post to build up the conversation and the controversy so you can cash in on the traffic. 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. me) could understand. We only tell our clients if they can afford it to purchase it. Where did the money go? Second, when it comes to investing, my experience shows that most insurance companies charge MUCH higher fees than are necessary. If the monthly premium is within your budget and and individual has saved money into other forms of retirement savings. In the end, I just don’t think that whole life is a good idea for the vast majority of people. 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 almost went with whole life insurance as a friend was working as an insurance agent and I had just graduated college. 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. First of all, I never said that whole life insurance is not an investment. I will have my wife do this when she retires and let it grow until we need the money. 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. Each type of life insurance product has its advantages and disadvantages. 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. 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. I’m not sure why people are excited about making 4%. 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. Financial advisers are often paid on discretionary assets managed. Please see the note in the post about the investment “guarantees” with these policies. 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. Most people are concerned about uncertainties with the insurance company being able to pay the benefit. I’m in the process of evaluating a whole life insurance with an Early Critical Illness Advance cover. To me, the value is not just in the cash value but the death benefit, which unlike in term will always pay out. If you look to join a company with momentum, you have a very good chance of garnering a 0.1% stake in a business that could be worth at least $1 billion if it goes public (i.e. State Life has combo Whole Life/ LTC policy that I would definitely purchase over a staright LTC policy. My mistake and my apologies to Jordan. 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. Bad Idea. Hi Matt, Thanks. 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. The truth is that it doesn’t account for the return that the individual investor actually gets. Whole Life Insurance is not for everyone. They don’t need a medical exam when they add more coverage. We described those situations in our article about the good reasons for whole life. I will say that I would be careful about taking that 4.5% return at face value, as I describe in the post. Sometimes that pans out and sometimes it doesn’t. 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. This is one of the features I absolutely love about participating whole life. If you stick with it for a long time, you eventually get into a reasonable range of returns. “Whole life has incredible benefits to protect against life events, I.e. Sorry to hear all this. For the most part, life insurance is a useful tool if you meet BOTH of the following conditions: 1. It would be more like saying don’t buy a car with a high rate of defects. 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. My only aim is to protect people from spending money on something that is more likely to hurt them than help them. It’s a very fair point, especially coming from someone with so much first-hand experience. I’m also mentioned a few other points to give some more context to your comment and why I disagree with your conclusion. You definitely give a thorough argument as to why we should not choose whole. To the author of this article: kindly post an article about Whole Life policy being “useful”, as you acknowledged. What life insurance company should I chose and should I chose term or whole life? 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). 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? Trust is everything and I make it my mission to earn my clients trust. Are you an expert? But then a little drama drives traffic right? I can go on and on and I’m rather sure you won’t read nor reply. 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. I’d love to take you on in an open forum but you won’t. 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. 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. The only things I want to be tied to at age 65 are my wife and kids. Wanda. 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. Could use: “sometimes”, “some”, etc. Shoes are great but if the statement is “size six shoes are great” makes the question more difficult to answer. Whole life policies include many fees that are never explained to you. 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. This is a fair explanation, but I have a few disagreements: 1. Sigh, another article with misleading information regarding whole life insurance. Some of your points make sense but saying that whole life is bad is a little off. Like I believe you mention several times, all the ‘pros’ sounded really attractive. 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. 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. Unfortunately, she was declined insurance by multiple companies due to family history and health. 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? And that’s drilled into us by New York Life, I hope you have continued success in your Financial Planning career. If so, then some kind of permanent insurance may be helpful. 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? If cash value were so good, the investment portion would pop-up in other types of insurance (automotive, disability, etc.) I am looking at it all from the perspective of an inheritance. And it would not be tax-free if she surrendered the policy today. Because that’s essentially what whole life insurance is. When it comes time to retire, roll over the entire Pension Balance into solid mutual funds within an IRA. 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. It all depends on what your goals and your priorities are. I am a musician and I have not learned very much about finances. 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. 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. Investment management and advisory services are provided by Wealthfront Advisers LLC (“Wealthfront Advisers”), an SEC registered investment adviser, and brokerage related products, including the cash account, are provided by Wealthfront Brokerage LLC, a member of FINRA/SIPC. Our company is backed by a $180 billion general account and a $19 billion surplus. 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. It will not depreciate like a car and it is more certain than lottery tickets! I’d like to add some thoughts related to why I purchased a whole life policy because I think it might help others. So without further ado, here are 8 reasons why whole life insurance is a bad investment. All that money I paid into the term was lost and getting insurance when older was more expensive. (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. I would just do it differently myself. I need to ask you a few questions. 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. Feature of the population are fairly expensive relative to our AGI that below.. ” see this: no one Wears a Bulletproof Vest Hoping to get of. 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