why whole life insurance is a bad investment

By | December 30, 2020

Matt, I have recently purchased a whole life policy. One such example is the issue described above where borrowing too much from your policy can cause it to lapse. Congrats on the thorough post! For quotes, I would recommend checking out this tool from the website Policy Genius: https://www.policygenius.com/life-insurance. I have no assets but also no debt. Point Three: One of the catches of the whole life agent is “Whole life insurance never expires!” Okay let us imagine a house insurance agent selling you an addon savings plan to your house fire insurance. It’s expensive, though, and we’ve often talked about discontinuing it because it’s so pricey. The dividends paid to the policy owners are also not taxable. There is only one other “tax free” vehicle he can turn to: life insurance. She brought it to my attention last month after being diagnosed with lung cancer, explaining she could no longer afford the payments. I would however sell it to my wife! But that is a very rare situation, and even then it is often better to simply invest within a regular brokerage account because of the flexibility and the cost. The insurance portion of WLI is so much lower than a TLI, why even consider it insurance? If you have already surrendered the policy, the best thing you can do is simply make a good decision with the money you get back. Do you have a recommendation of someone to talk to. The policies that Kim are describing are likely Universal Life policies, not true whole life policies. He ate up all their premiums as well even though their policies were lower than mine. First, the rate may increase in the future (at the discretion of the management) to a max 0.25% so that over time would add up if you took out a loan for retirement and had no intention of paying it back. 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. I, 22 year old male, can pay ~$13,000 into a universal life policy throughout the next 20 years (~$650/yr, ~55/mo), never touch it again, and that will provide a death benefit of $100,000 until I’m at least 75 years old (I will put more money in of course since I plan on living past 75). This isn’t something that should be done without compensation in the form of large expected returns, and even then the risk would have to be very carefully evaluated. 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. Sure thing Dylan. The primary purpose of life insurance is to protect the people who are financially dependent upon you. Hi Mike. I am currently unemployed so I could not afford 600-700 a month. Whole Life allows you to lock in a guaranteed premium, that will never increase. If you go all 30 years and don’t die, you didn’t “get nothing” as you say. You want to convert but find out the conversion period ended in the 10th year. A LOSS of over $30K! I have given my reasons why I think it is illiquid. In any case, I wish you the best of luck! It’s just to say that I wouldn’t rely on that information when making your decision. If you have not yet received the life insurance proceeds then you should be contacting the company to understand why. And there are plenty of other ways for people to get bond-like returns without the downsides of whole life insurance (like, for example, bonds). Buying mutual funds and utilizing the stock market with an IRA is the way you do retirement, not with Life Insurance. I am a civilian here so no affiliation as an insurance salesman or financial planner in any capacity. So without further ado, here are 8 reasons why whole life insurance is a bad investment. I bought a whole life policy in 1998 at the age of 50. Savings, The Market and Insurance (a mix of whole and term) is the best way to plan and protect one’s retirement. Still, over the past 4 years (for which I have full records that enabled these calculations), paying the premium has increased the cash value each year by over 5% in addition to the premium amount itself, and has increased the death benefit by 120% or more of the annual premium, making it worthwhile to me, at this point, to keep paying the premium on this policy. The policy is not an investment and never was intended to be one. I began this policy in 2000 term life. This is eye opener for me. Thanks so much for all the kind words Deb! As you say, it’s all quite subjective. If you think you’re likely to live into your 60s or that capital markets are likely to appreciate, even modestly, term life insurance is a much better deal. If you can annuitize enough to provide you with funds to meet your income “needs” (spousal annuities are available for lifetime income security) with the remainder invested to provide for your “wants”, you can still have the security offered by a pension without actually having the pension itself. To be clear, it’s certainly possible that this would be a good move, but you would only know that after a careful and detailed analysis of your specific pension, your specific goals, and the rest of your financial situation. So if you live say past 80 and then die, unless you had a fair amount of savings, your children have to pay for your funeral costs. 3. Second, I do briefly mention situations in which some kind permanent life can be helpful. It will almost certainly be lapsed by the time you really need it. We’re both in our late 40s and will maintain our current term life. I’d suggest asking up-front how these people are paid, because some are non-commissioned (e.g. Several comments……first, I didn’t read all the posts so I apologize if this has already been discussed/addressed………you mentioned loans on a whole life policy is the means by which “tax free” income is distributed and that makes for the equivalent of double taxation, however the first monies coming out of a whole life policy would be your own contributions and therefore no taxation would be in effect as those monies, when contributed, had already been taxed…….the loan process would kick in when the policy detects taxable growth and would switch to loans instead of withdrawals………..also, let me just mention the insidious monster called “sequence of returns” and how it pertains to “returns” in the market……..returns in the market are reported by averages…….once you look at the “real rate of return” of a stock or mutual fund you might find the long term return of a whole life policy much more palatable……….example: what is the average rate of return in this example and real rate of return……..you have a $1,000,000 home and in the first year it goes down by 40%……….your home is worth $600,000…….the very next year your home goes up by 60%……..your home is now worth $960,000…….but what is going to be your reported average rate of return?……….10%, yet you are still under water; the “real rate of return is -4%…….this is a very eye opening expose on how the “market” makes things look…..it is the downs in the market that kill an investments return…….there are no downs in a whole life policy………..I hope this helps in perspective. I buy stocks, bonds, CD’s, have 401K, IRA, bank deposits, etc. Did we still make a mistake by buying whole life? I would encourage you to try to find a proponent of whole life who hasn’t either bought it themselves (and is therefore confirming their own bias) or doesn’t earn a commission from selling it. Unfortunately this kind of story is all too common, and I really feel for your mom. Why Long-Term Care Insurance Is a Bad Investment. We were sold a whole life policy from Mass Mutual for my husband, but we also have term insurance on both of us. I have zero or few friends of consequence. It’s free! Interesting read, I certainly agreed with the lack of transparency and fees associated with some policies. Those are the things I would look at if I were you. 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. And the company I use which sadly I’m not going to talk about since I don’t even want anyone to know I wrote this “compliance would massacre me”. If you earn too much for a Roth IRA especially (180K plus for a household roughly) then whole life insurance is literally the only place to get tax free savings on growth  (tax free municipal bonds also but these have a lot of risk especially with interest rates going up). Great read!! Is it a good idea to cancel them? When you say “If you earn too much for a Roth IRA especially (180K plus for a household roughly) then whole life insurance is literally the only place to get tax free savings on growth”, I assume you mean other than a 401(k), health savings account, Backdoor Roth IRA, 529 savings plan, or self-employed retirement accounts. Now that the policy is 21 years old, I am undecided whether to continue paying the annual premium or surrender the policy.I have paid $25,126 over the years, and will walk away with $36,250 if I surrender it now. Those have increasing premiums. a Whole Life Insurance policy is a non-risky , non-volitile way of earning a high rate of return with a very conservative risk portfolio. Would my money be better invested in that or elsewhere? Interest guarantee is 4.0%. Thats not the sole purpose of whole life insurance is it? this is a very interesting article. This is outside my area of expertise, so if it’s a substantial amount of money I might consider talking to an attorney. Definitely don’t beat yourself up though, and take heart in the fact that you have options going forward. I definitely agree that it can be beneficial to talk things over with a financial professional who can take a look at your situation as a whole and help you make the right personal choice. Thanks for the thoughtful comment Dan. If no, then why pay the extra costs to do this through life insurance as opposed to just saving it? Guarantees him a minimum cash value of $68,900 contractually guarantees minimum. There are situations where it might make sense, but not for the majority of us. Then once you have paid down all debt, built wealth, and self funded funeral expenses you surrender your policy. anyhow I wont debate you on that as I can see where you are coming from. Now when the person passes away. And you make some good points, but here are my thoughts. Why is whole life insurance a great investment for him? Let me know what I can do to improve that. As for your point about there not being any real life examples with real numbers, you can review a sample whole life illustration here. So here’s what I meant to say, and hopefully this time I can say it a little more eloquently. The Specialist will then create a plan that fits your financial goals and needs. Borrowing the money is tax free and you can borrow up to 90% of what is in the account. And you don’t want to focus on the interest rate specifically but on the actual values in each policy that are “guaranteed” – not projected. A while back I wrote about the mistakes I initially made when purchasing life insurance policies for myself and my wife, and one of the things I mentioned was that at the very least I was relieved we had avoided buying whole life insurance. So if I got duped into a whole life policy in December/January, is my best bet to cancel and walk away? If you would like any more assistance with this, please don’t hesitate to contact me directly. This is money sitting in saving accounts now because I value the feeling of liquidity. I get to collect all the interest I would have paid the banks. Also, whole life does not carry the same penalties for withdrawals as these other accounts do. 2. True whole life policies have set premiums, not increasing. I have completely paid one off and will never sell it. I’m curious to know. Would you want to give it to charity or start one in your child’s name? They’re rare, and the vast majority of people will never have a need, but I wouldn’t go so far as to say they should never be sold. Ask for a full in-force illustration, which is simply a projection of how the cash value will grow from this point on if you keep paying the premium. First, you can check out my services here. Would you say its not worth an investment to buy WL for this? I have whole life that I’m not understanding . Any argument otherwise is a misunderstanding of how insurance is supposed to work. I’m stuck with whole life supposed to be paid off now. Comparing defined benefit plans vs registered accounts is a little bit tougher. I will have to do more research in this matter before I enter into this whole life contract. They don’t need a medical exam when they add more coverage. I also think it’s a good one in terms of reinforcing the point that in most cases it’s not a good investment. Consider your policy’s current cash surrender value as cash in hand. I am aware that if you have a certain level of income and net worth, an overfunded policy may be a good decision for you, which is why I even mention it at all. I’m glad you found something that works for your situation! Jim, first of all I’ll just say that I’m glad you found a solution that works for you and your family. It’s typically when people start thinking they’ve eliminated risk that they tend to get themselves in the most trouble. I do agree with you that “there is no ultimate solution to financial success”. I can get a whole life policy for 26 per month locked in for life.Seems it would save me money later. Please see the note in the post about the investment “guarantees” with these policies. I also found that converting a term insurance police into whole life can be very expensive. Your comment on liquidity and guaranteed returns is tough to agree with too. You could go the bank and ask for a loan secured by the equity in your home. You can easily surrender the cash value that is considered growth too. Take a look at your bank’s annual report – what’s that at about the 3rd to 5th largest assest holding? But please, please keep in mind the following: 1) With whole life, once your cash value starts building, it generally doesn’t go DOWN. As a disclaimer, I should point out that I agree that unscrupulous life insurance agents definitely do have a tendency to oversell these policies where term life would do, and I do not disagree that commissions are often the likely motivation in many of these cases. When the market experiences “down years” you will want to used a fixed investment to take your distributions in order to give your market-exposed vehicles time to recoup losses. Two words – Garrett Gunderson – look him up. I bought a universal index plan with rider for chronic and terminal illness but not sure this is a good investment. But…. The fact that it’s a smaller amount being bought doesn’t mean it’s any better of a product. This is totally wrong!!! I am a fairly wealthy Canadian professional with a corporation. When you buy term insurance the premiums are gone forever. 5) Several comments have stated that whole life policies are useful primarily for 2% or high net worth individuals and families. It is MUCH more expensive than term (often 10-12 times as expensive), and most people don’t need coverage for their entire life. But the bottom line is that you can’t take that “guaranteed return” at face value. It goes up. They are loans. You should never have to be sold into buying something your not sure of. The salesman said that you can quit paying the premiums at any time after which you would continue to be covered until you zeroed out your investemnt account. That way it’s available if you need it and can be passed on to your children and grandchildren if you don’t. 4) Tax diversification. It depends on what an individual client need and his or her situation. If the premiums on whole life are 10x as high… so are the commissions. No, if I were to compare the returns against investing that extra premium in an index fund, assuming the index returns are going to be the same as what it was in last 10 years. Not good. A whole life policy is a small slice of the pie; diversity. THAT is where it may be an appropriate product. Thanks again for sharing all of your thoughts and analysis, and I wish you the best of luck going forward! I would be extremely, extremely careful before venturing into anything like that. It can help with estate taxes. but if you don’t do anything about it, then you’re powerless. If I’m understanding correctly, it sounds like you originally took out a term life insurance policy before switching to a whole life insurance policy a few years later, and since then you’ve seen the value of your whole life insurance policy increase. That kind of person is also difficult to find. Matt, please feel free to email me. However, 30 years ago, I could not predict the future, and if I had to do it all over again, I would still buy the same policies. First, they benefit from reduced management fee pricing, thereby improving returns marginally over the course of fund accumulation. Our $250,000.00 term policy will expire in 2019 and it does allow us to convert to a whole life policy before it expires. 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? Certain insurance companies, and particularly a good agent, can help you design a policy that minimizes fees and minimizes the cost of insurance so that more of your money actually goes towards the investment component. Liquidity is important because it gives you options. What i have learned thus far, is that the majority of people seem to be looking at the total amount of the investment at the time of retirement. 2. I did overlook that point. To me, the value is not just in the cash value but the death benefit, which unlike in term will always pay out. This is extremely low risk. NOTE – the policies I have been quoted for this are called a “2nd to die” policy, so the death benefit, if there would be any remaining, is only paid out after the 2nd person dies. Hi Julian. After all, insurance has nothing to do with renting vs. owning. In doing this, an investor earns stock market returns but transfers their downside risk to the owner of the index (SPY or SPX). The “Guaranteed” is what the insurance company is promising you, is that correct? First, whole life is a lot more expensive than term life. That’s because what ends up happening is that a lot of people get talked out of their permanent insurance and then outlive the term insurance and the insurance companies just keep everyone’s money. If you need life insurance (which in order to find out , you must ask yourself one question : am I going to die ?) You’re absolutely right that these policies vary from company to company. How would TLI or other assets not cover that? First, it is not a very good college savings vehicle. 3. Keep in mind this is not comprehensive and only deals with a narrow issue: the question of a basic whole life vs BTID analysis. Life insurances plans are a bad investment know which one is paying premiums on whole life insurance values... Strongly disagree with the resource I wish I could obviously not been exposed to risk! 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The beginning of a policy loan go into details afraid that I like... More context to your questions have already been addressed in the policy covers has a for... Taxable account, flexibility among them are taxed differently someone paying $ 1,000/month into it the death..

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