why whole life insurance is a bad investment

I am considering a couple options: Which means in a taxable brokerage account for example or a bank account you would have to GROSS 6% or so to match this over that same period every year on average? The three nagging issues that cause me to continue to question this asset are And that interest applies to all money withdrawn, including your contributions, which were already taxed. For quotes, I would recommend checking out this tool from the website Policy Genius: https://www.policygenius.com/life-insurance. Focusing only on the fact that you may one day be able to stop paying premiums ignores a number of other factors, many of which are addressed in the post, that put these policies at a disadvantage compared to other options. So it’s more about the design of the policy than the amount you’re actually contribution. Whole Life Insurance Is A Bad Investment: Before you start contributing to a policy’s cash value, a whole life insurance company charges you mortality and administrative fees. I could not go into details afraid that i would give out too much information about my family life. I seriously doubt anyone will spring for an obituary when I die. Hi Matt, great article. The most important question to be answered when getting insurance is, how much do you need? 2. Your cash flow on each line (up until the last one) is simply your premium payment entered as a negative number (because it’s money flowing out). Like any car lease deal or stock purchase, there can be good and bad deals; one should not declare all forms at all points in time to be definitive. If I had no money, it would pay for my funeral and leave funds to my spouse. Reviewing now and feel like we were suckered into whole life. You can easily surrender the cash value that is considered growth too. Ok, so some companies might be marginally cheaper, but I literally just got this quote for Whole Life. Thanks. I have some independent insurance experts that I work with and could potentially run it by them just to see what the options might be. I am divorce for only twenty eight years and have a learning disabled adult son who has never work. Is it good or bad? 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? For example, a policy may have a “guaranteed return” of 4%, but when you actually run the numbers using their own growth chart, after 40 years the annual return might amount to less than 1%. There are institution(s) that have always paid a dividend and have been top rated every year. Often 8-12 times more for the same amount of coverage. I know that flucuations in the market will occur and if a recession happens when I am 62, I will use my cash and policy cash value to hold me over until the markets recover. 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. so what is good for me is not good for someone else. When the life insurance risk is not so preferred the numbers might look very different, as Term is no longer so cheap. 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’m very confused suopose to sit down with agent so he can explain it better. When you buy life insurance, there are essentially two types: term and permanent. Whole Life) you can use that as an effective way to bridge the gap until the market comes back up again. Poor people take out insurance to cover their death and to leave something for their children. Still, while I am pretty satisfied that my prior decision-making was close to right, I do wonder if you see this all very differently. I understand if you don’t like life insurance, but you don’t have to lie. Your actually doing a noble thing as a father and informing people that need to hold on to what they can or invest it correctly in this economy. This means that you can save money now by buying term, but still have the option open to get some permanent coverage later. Let’s consider th facts. So no, whole life is not a good option for this kind of protection for the vast majority of people. I got married and had mortgage, student loans, and large term life insurance bills because to go without any seemed irresponsible having no wealth but whole life was too expensive. Unless you’re Warren Buffet, this isn’t something you should part with lightly. Again, as pointed out countless times in those comments: DO NOT CONFUSE LIFE INSURANCE AND INVESTMENT (with a capital “I”), in some sense life insurance can be an “investment” (with a small “i”) You can email me at matt@momanddadmoney.com or start by filling out a short questionnaire here. Cash value is not subject to market losses, as it is with stocks and mutual funds, etc. In theory, you should be compensated for this difficulty in the form of higher returns, but as we saw above this is not the case. The single premium is $100K with the death benefit to go no lower than $182K. In nearly every case of par Whole life if you are under 50 you will have a cash surrender value equal to 100% and up to 800% of the premiums paid. What is more important is the final death benefit in $$$. I have had anxiety about this decision since, and am days away from my second annual premium payment and have thus spent a great deal of time researching and thinking about the implications of this asset. So unfortunately this article does need to exist simply to give people the opportunity to come to a more objective understanding of how these things compare. As a complete insurance/finance novice studying for my LAH license you’ve given a lot of food for thought. It doesn’t go to your beneficiary. Personally, I still wouldn’t buy them. I probably rate whole life near the bottom of priorities, actually, but that does not mean never-ever, even for people who might on the surface not appear to be ideal candidates for it. Second, I used the policy illustration I received as an example of the kinds of policies I see all the time. I view whole life as a product, like my house, which I also don’t view as an investment. or is it something that they shouldn’t relay on.. they are doing it for more their retirement and asked me for help but i am very confused about this whole life plan. Second, it takes much longer than 5 years for what you’re talking about to happen, excluding the premium paid in. And that $13000 is spread out through 20 years. Who are we helping in that case? If that’s the case, I have heard of people having some luck selling these policies to a third party. hi..any idea about how to work out a whole life insurance considering the inflation effect.. The analysis shows what would happen if you took the difference in premiums between a whole life insurance policy and a term life insurance policy and invested it, with the return you could expect from a diversified investment portfolio like those Wealthfront offers. No way could a poor farm kid without inheritance or wealth and limited income but high student loan debt create that kind of wealth for his children in the immediate or most vulnerable time period. It’s tough because those first couple of years are typically the worst in terms of performance and that money is lost no matter which way you go. I hope this is helpful discussion to some. 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. With the right policy with guaranteed returns, my whole life police has doubled in value and will be inherited tax and probate free to my dependents. Thanks for reaching out Winson. Liquidity is characterized by a high level of trading activity. 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. The withdrawals you took out in the (distant) future was marketed as a tax free alternative to a 401k or 529 payout for retirement or college or for any expense really. He has contacted many companies for alternatives, but he is either not eligible, or the cost is too high. Met life for example states ” During the conversion period shown in the policy schedule you can convert this policy, while it is in force with all premiums paid, to a new policy–On a plan of permanent insurance, with a level face amount, available on the policy date of the new policy.”. Difference Between Whole Life & Term Life Insurance. however. They don’t have to go through a medical. With that said, it’s also a good idea to invest that money as efficiently as possible and I do not think that whole life insurance provides that efficiency for the vast majority of people. To leave her in the same boat, as my parents did, is in no way wealth building. There aren’t any get rich quick schemes and any plan can work as long as an investor looks to get the maximum value for the money they pay. Whole life offers me a good way to have a $10,000 policy, which will cover funeral expenses so my kids won’t have to worry with that. Hi Jen. Thats not the sole purpose of whole life insurance is it? As you say in the article: if one’s taking it for income are they really going to pay it back…? I agree with you, generally. I bought them for each of my kids. Thanks. I may, or may not, need part of this money during my retirement. Garrett Planning Network is great if you’re looking for someone to help on a limited project-type basis, and NAPFA is another good resource to look into. With some policies, the premium can even go up depending on the performance of the policy, forcing you to pay more than expected if you want to keep the coverage in place. I don’t find Mr. Taylor’s arguments persuasive. But the answer also depends on your overall insurance needs, your other goals, the expected performance of this policy going forward, and other investment opportunities available to you. All of this being said; putting large amounts of money into WL policies is foolish unless you have maxed out other strategies. I have indeed maxed out all my tax-deferred savings options. But as you say, when viewed as an investment for the majority of people, it really can’t stack up to the other options out there. Term life insurance can be an important piece of your financial puzzle, however, if you have people who rely on you for financial support. I am looking at a whole life insurance that has riders for cancer, stroke, etc it’s $250/m premium and 500k death benefit. She requested I review/change the policy to pay less so she would have lower payments. But did you know that if you die, you do not get your cash value, only the Face Amount of the Policy? Good questions James. Whole life insurance has many qualities that make it unfavorable that have nothing to do with a modest expected investment return. I did a number of searches and read a few articles before stumbling on to yours. To make such a blanket statement that all whole life policies are bad, is equivalent of saying because one BMW 750 was a lemon, don’t but one because they are probably all lemons. Hi Matt, Im, 41yrs old and have 8 yrs old daughter, My friend told me to get life insurance so that if something happen to me my daughter will get something and now I have schedule to AAA life Ins. But a decision cannot be made only based on numbers. The upshot is that the taxation of a 401(k)/Traditional IRA down the line is often beneficial to being taxed up front. We are considering strongly the hybrid whole life policy with a LTC add-on. Why would you want to buy and sell insurance policies frequently ? It may be useful in some cases if all the better investments have been maximized and one is looking for a tax free long term low yield conservative investment account that allows one to withdraw tax and interest free and provides a life insurance payout in the event of death. Should we be expecting those 0.74% yearly returns for a fully paid-off policy? Are you asking about people with terminal illnesses? So figure out why you want to consider this investment and whether it will accomplish your objective. Term insurance protects you while you need it and goes away once you don’t. If you’d like some help doing the analysis, feel free to reach out any time. If an agent talks about a policy as an Investment, throw that bum out of your office or house. I’m 71 and just going to signup for $4,000 coverage, paying $28.25 a month. I agree that tax diversification can be important. Great read (http://momanddadmoney.com/insurance-and-investing-dont-play-well-together/ as well). I hope that helps! Maximum-funding a corporate owned UL policy only long enough that it can go on premium offset, where the policy returns are enough to pay the premium indefinitely, can be attractive as well. If you’d like to talk things over in more detail, please feel free to email me directly at matt@momanddadmoney.com, or you can call me at 850-426-4034. But like you said most agents have no clue about real financial planning. This policy is being presented to me by an insurance salesman who presented himself in a seminar as an expert in Social Security to target his audience. Could use: “sometimes”, “some”, etc. Read a book that said that I should instead buy term and invest the difference. Thanks Paul. Hi, Matt. So I find that paying even $48 per month for a $10,000 policy gives that much security. If you think the markets are not likely to appreciate over the next 20 years then whole life insurance is a better deal. 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. But I believe that their adjustable comp life insurance policies allow you to combine term and whole life insurance in various proportions based on your desired outcome. We need to take a cold look at what would happen if ine of our children died. There’s a good chance you could get the same benefit, or an even greater benefit, at a much lower cost with term insurance. I can get a whole life policy for 26 per month locked in for life.Seems it would save me money later. 5. Here are some responses. What if you don’t qualify for term life insurance? This is known as a “wash loan”. Love your mindset though! But I can give you a couple general points to consider. When you feel comfortable with your reserve, you can cancel your term life insurance policy without a penalty. I am a fairly wealthy Canadian professional with a corporation. So your example of a $30,000 whole life policy with a $20 premium compared to a $30,000 term life policy with that same $20 premium is not a valid comparison. And there are many other terms and conditions that make these policies very complicated. But it’s not meant to be an investment. Now when the person passes away. 2. What is your end goal here? I am not aware of term insurance policies for people much past the age of 70 for $200,000 or more. Also, any recommendations on what to do with the rest of our savings rather than keeping it in a low earning savings account, but maintaining cash flow flexibility? Any person who uses permanent insurance should be out of debt and have the discipline to maintain a long term approach. I’m going to do some digging on the cost of a trust vs. the cost of whole life. Of the companies I reviewed the 30 year history of dividend ranged between 5.4% (lowest) to 13.3% (highest) . Who knows…who knows what will be there. The reason for doing so is that I’ve come across many cases of colleagues with failing health in my work recently, and was told that there is a 33% that anyone can get cancer. I’m sorry to hear that you had such a negative experience Chris. And yes, the “guaranteed” cash value is the minimum growth that the insurance company is promising. It’s financial education. Life insurance salesmen are trained to make these policies sound REALLY attractive and their arguments can be quite persuasive. Borrowing the money is tax free and you can borrow up to 90% of what is in the account. Term life insurance is like having car insurance for as long as you own a car. Can you please give me an advice coz I’m confuse now since I read a lot of things in this article. single. It will also show you how that cash surrender value is expected to grow in the future. If you would like to bring more facts into this discussion, I would be happy to continue. The primary purpose of life insurance is to protect the people who are financially dependent upon you. 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. I admittedly jumped into this without doing the proper due diligence as more of a favor to him. First of all, it’s important to understand that while the death benefit is certainly valuable, it is not technically an “asset”. But this doesn’t mean putting some of you disposable income into a permanent policy would be a bad idea–especially those individuals maxing out 401(k)s. (young attorneys with high incomes and low expenses?). I would encourage you to run the actual numbers yourself and compare them to the alternatives available to you to make sure you’re getting the deal you think you are. Except I could argue renting a home and being able to live there is more advantageous than renting insurance and what hoping you will die so your kids will get the money? I’m in my sixties and I have no investments although if I work again maybe I will. Finally, I would never invest my money with an insurance company, so that fact that you can sell mutual funds and other securities is moot to me. Of course we all want to keep our retirement contributions steady, and even see them increase, but life happens and there are many instances in which having options is incredibly helpful. Dividends are partially overpayments of premium based on actual mortality vs. expected. Because dealing with some of our top clients who are in a tax bracket that you nor I will ever see, they are happy with the level of service we provide and the products we offer, maybe you just had a bad agent that needed to close a deal before the month’ s end and made you a customer and it was very transactional as opposed to assessing your need and making you a client. Sorry to hear that Debbie! 5. And it would not be tax-free if she surrendered the policy today. I’m 25 and just started a whole life policy a few months ago and pay 460 per month. If you borrow it and don’t pay it back, it is subtracted from the amount paid to heirs at death. Great questions! Won’t a trust fund provide protection from any catastrophic… ie early hospice care etc.? The majority of us do not need a permanent death benefit and do not have the large amounts of money on hand to make these policies a reasonable investment. Beyond that, the savings component within the policy is not taxed as it grows, which is what most salesmen are likely referring to. 2. I have given my reasons why I think it is illiquid. Sorry to hear all this. Whole life insurance is like having car insurance forever, even when you no longer own a car. I’ll just pretend it was a crappy, overpriced term policy . Or paying for car insurance when you no longer have a car??? Best of luck! EVERY PERSON that cares for someone or something (be it a spouse, a child, a charity, or anything else) can benefit even more, by virtue of having a guaranteed death benefit. I’m not sure what good a continued back-and-forth will do, as my responses to all of these points are all already either in the body of the post or in previous responses. Diversification is an issue with cash value life insurance if it makes up a good portion of your assets, and if it would, you shouldn’t be buying it. Thanks for your input. I say all of this to admit that I am biased, even if only sub-consciously, as I have tried to think in a balanced manner with regards to this decision. Life insurance isn’t meant to be a guaranteed payout. 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? Remember that there’s likely no need to rush this decision, so take the time to do the research and come to a conclusion you are all comfortable with. For example, let’s say a 25 year old determines that he needs $3,000,000 of insurance. For the first decade or so, you are almost guaranteed to have negative returns. Also take a close look at the fees and the structure of the loans that you will take out in the future. You spend money in expectation of a financial return, the size of which is usually known but the probability of which is oftentimes unknown (because many people cancel term policies or cannot renew them before they pass away). Also keep in mind that this benefit is generally NON-TAXABLE! There is no way to counter this perfectly if you are that skeptical, which it is your right to be. Is there any way out of this that would make more financial sense? I appreciate your input Steven and stand by all the original points made in the article. At more or less the same time, my wife and I bought term policies on ourselves, in our early 30s. But you are right that it is much harder to find affordable term life insurance as you get older, and in your case some kind of permanent insurance may make sense if you have an insurance need. What I don’t like about term life insurance is that it ends. Of course the fees are applied to your principle and interest, which drags the value of your account down to painful levels. In general, there are ways that you can overfund a whole life policy to make it more attractive than the default, but I still don’t see any reason to even think about it unless you’ve already maxed out all of your tax-deferred space. Guarantees him a minimum cash value of $68,900 contractually guarantees minimum. So yes, I am generally a proponent of putting your money into something like a Roth IRA at this point over life insurance as an investment. The WL insurance I’m looking at requires me to pay a total of $70k in premiums, over just 10 years, and I’ll be covered for $100k sum assured with a booster factor of 3 (ie $300k payout) before the cut off age of 70. But there is too much to talk about that those of us that are in the industry and are actually licensed to help people in these areas and it would take up too much space. Any time something is sold as being able to pay for any financial goal no matter the market conditions, it’s usually too good to be true. You provide 8 great reasons as to why whole life insurance isn’t the best option for the majority of people. Early in life though, I would definitely not do this and choose a Level Term Policy instead. But for 98-99% of the population, yes it is perfectly accurate. Despite recent worry and analysis that I have made the right move I am still of the belief that it is, although I appreciate your critical review to further my education. I currently max out all of the “pre-tax” / “tax deferred” options I have available to me. Some policies work differently, but you definitely shouldn’t assume that the policy will continue to grow unchecked while you have an outstanding loan against it. However, if you have 3 to 4 years worth of living expenses in a non-correlated asset (I.E. In response, a reader left the following comment: “General consensus is that you shouldn’t view insurance as an investment. Hindsight is always 2020, but one cannot predict the future, that is why we buy insurance. It didnt make sense to me from a pure investment standpoint. When you buy term insurance the premiums are gone forever. I almost went with whole life insurance as a friend was working as an insurance agent and I had just graduated college. I would just do it differently myself. Nothing in this communication should be construed as an offer, recommendation, or solicitation to buy or sell any security. Valeria, I really appreciate your article, and find it fascinating that comments are ongoing for years. Completely agree. Over those 50 years, at that 8% return, that money would have grown to $327,231. If inflation happens and interest rates and taxes increase, the SS benefits will increase and this person will have increasing income that won’t be consumed by an increase in taxes as all their income would be tax free. Karma? I imagine that any level of whole life insurance would require a significant percentage of your income just to pay the premiums, and while your intent is obviously incredibly good I hate to think about the struggle that could cause along the way. You and your family deserved better and I hope you’re able to get to a reasonable outcome. It goes up. Many times, an … Earning a living ripping people off is a no-no. Thank you for your article and really speaking to the “lay person.” A lot of things in your article really make sense! That is, what would the insurance proceeds actually be used for? In a recent blog post, Wealthfront’s Chief Investment Officer Burton Malkiel made some predictions about what could be on the horizon for…, Interest in day trading — the buying and selling of securities on the same day, often online, on the basis of small, short-term price fluctuations — explodes whenever there is a sharp upturn in the market over a short period of time. First of all, I never said that whole life insurance is not an investment. God bless you. Very interesting article and lengthy thread of comments, and appreciate the author’s response to comments throughout for a post several years old now. I am well aware that there are other reasons people buy it, and those are explicitly acknowledged in the article. A couple of corrections. I haven’t run the numbers, as it’s very difficult, if not impossible to find online quotes for whole life insurance where you don’t have to give out your contact information. But that will not benefit you, only the person receiving it. To be quite honest this is a complicated question without a simple answer. Pretty much anything can be quantified and looked at as good/bad investment. Thanks Matt! But you could make that same argument for any investment strategy on earth. If you live to age 100, your cash value is paid up and the policy is matured. You’re right that it can be useful in the right situations, but those are few and far between. Good luck with your studies. In states like NY the guarantees up to 500K offer a safety net similar to FDIC coverage. Can you expand on why this can be a good financial instrument in this case? I have two main responses. When Kim says that her “cash value was not making good returns” she is referring to a policy that is tied to the market, not based off of dividend payments. Whole Life policies are interest rate driven based on the economy, but your “Cash Account” will increase every year, regardless of the market. Over the last week I looked over the tables that were presented at the meeting as well as reading their FFIUL brochure cover to cover. Whole Life products as “investments”…what a joke. New York life wrote to me stating I can change over to whole life insurance without having to answer health questions or take a physical exam. I have been paying into a whole life for 8 years, do I get out of it? Right on! You should keep in mind that insurance investment portfolios are generally quite boring, if you’ve done your homework and picked a good provider. Evaluating a policy that’s been in place for 7 years, as it sounds like yours has, is very different from evaluating a new policy. 6) Tax-free withdraws misleading–financial planners should already have expalined this to clients before even accepting the policy. All of that being said, I am currently leaning towards keeping the asset in place and welcome thoughts. 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Reasonable range of returns into account year ago benefit increases over time ( supposedly ) …usually decades... Graduate School of business or would you say says, “ some ”, so can... Exposes you to lock in a limited number of years these policies very complicated about anyway regarding returns! The single tool you have any suggestions you can google that CLU, CHS, and hopefully this time reach. History of dividend ranged between 5.4 % ( 5.72 % + 1.40 % ) up,! Early and accumulates a diversified portfolio is a great investment for the term. I approached 70, which is at 7.6 % … thank you for this applies... Disabled but thankfully it never happened there really is guaranteed to be with whatever insurance company receive surrender! Experience with your conclusion putting your final wishes in writing advisor ” this was a professional!

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