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Why Whole Life Insurance Stinks!

There are 5 reasons why no one should ever, ever THINK of buying whole life RIGHT?

  1. Commissions: Life insurance salespeople typically make a base commission of 55% of your first-year premium, 7% yrs 2-5 and 2% every year thereafter to provide annual reviews and service to their clients.
  2. Financial entertainers say buy term and invest the difference is a better deal.
  3. There’s no need for permanent insurance, unless you want to spoil your kids and grandkids.
  4. Cash value buildup takes forever and has a poor return.
  5. Nobody has it.

To be fair to both sides of the conversation, let’s address each one of these arguments…

1. Commissions are a reality of any sale, whether it be your home, car, medical device, or new TV. A salesperson’s true task is to motivate you to act in your own best interest. Assume the person across the table is a commission-driven financial sales representative, advising a client with $20k of a disposable income for “financial planning”. Most investment advisors will charge a management fee that nets them 1% (some go much higher than this). A $20k annual investment over a 30-year study period earning 7% annually will generate $190,258 to the advisor. If another advisor were to allocate the same $20k annually to a whole life insurance policy for 30 years, he would receive $26,600 over the same period (assuming 55% first year commission plus renewals at 7% yrs 2-5 and 2% years 6-30). On either side of the coin, cost should only be an objection in the absence of value. Just because one product produces commissions does not necessarily make it wrong, just as another product with reduced fees does not make it better.

2. Buy term and invest the difference (BTID) is a strategy widely promoted by media talking heads and investment-oriented financial planners. Rambling about the sexy stock market each day is exciting to an audience, whereas there’s not much a host can due to spice up whole life insurance.  You should analyze the probability and practicality of a strategy. BTID obviously leaves more money available to allocate towards the markets. Assuming you actually invest the difference every year, which takes a lot of discipline, this strategy may provide more liquid assets for the first 20 years than if whole life entered the plan. However, by year 20 the cash value inside whole life may have yielded a 5% to 6% taxable equivalent internal rate of return (assuming a 30% tax rate and whole life purchased on healthy 30-year-old male.), comparable to that of a moderately managed portfolio over the past 20 years. At this point the death benefit of a 20-year term policy will have expired, thus leaving you with similar lifetime values, but significantly less death benefit for heirs moving forward. In short, the BTID approach offers greater early liquidity, but at the risk of market fluctuation and a temporary death benefit.

3. Who needs life insurance for your “whole life”? So, after 20 or 30 years of term life insurance, your estate value drops overnight dramatically. This of course won’t matter in retirement unless you want to spoil rotten future generations. Not so fast, without a death benefit in place, you are forced to multitask with your portfolio for all retirement and legacy goals. Whereas an additional tax-free death benefit provided by whole life can act as a permissions slip for you to maximize your pension benefits, spend down retirement assets, and enjoy Social Security without disinheriting your spouse. This tactic still puts you first!

4. Cash values certainly don’t boast the exciting ups and downs of the stock market, but that’s OK. Most investment advisors will agree that fixed income needs to be a part of a responsible portfolio. Just as you cannot expect a term policy to last forever, nor can you expect their cash values to jump 20% in a year. The tax-deferred nature of whole life cash values and income tax-free access provides a nice tax hedge, complimented by fluctuating dividends that can mitigate the interest rate risk felt in other investment vehicles. And, who doesn’t like a guaranteed minimum rate of return of 4% each year, even when the market tanks? 

5. Nobody owns whole life insurance anymore.  In reality, whole life remains the most popular life insurance product, having accounted for 36% of life insurance premium in 2016, followed by index universal life at 21%, term life with 21%, and variable universal life at 6% (versus 33% in 2000), according to Life Insurance and Market Research Association’s (LIMRA) 2016 Life Insurance Sales Report.

Many people think whole life insurance stinks for quite a few reasons. But maybe, just maybe, it depends on what you’re comparing it too, how it’s used and how you want it to compliment your other investments. If you find yourself wanting to own rather than rent and discover how you can have more retirement cash flow with the same legacy, or more legacy with the same retirement cash flow, maybe this boring product around since the 1800s deserves another look.

Excerpts -Kuderna, Bryan “Why Whole Life Insurance Stinks” Think Advisor, April 20, 2018  

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