Why Life Insurance Is Not an Investment
with information about how to get the plan you have invested in for your family. I am 43, have minimal saving, self employed wthout health or life insurance - and have been researching both online. If necesssary - i'll pay you for your honest advise - as the reponses I've receive from "agents" is so comlicated and every answer is folowed by 5 pages of fine print to desipher.I say something about the insurance industry when even those selling the products to other hard working americans feel the need to intentially misllead prospects to get a quick buck.I can go back to aged 30 and do it right - but at my age I need to do something immediatly - as I don't have a company matching retiremant plans or helping with insurance cost with group discounts, and although in great heath - need to plan for the "what if ".
That's what happens if you buy period and equip the conflict in heterogeneous no-load, low-fee indicator finances. I did this and over a 20 period phase and I now get hundreds of thousands solon in assets than I would bed had if I had bought the "enduring insurance". My constituent contract leave still be in essence until age 70, should I terminate to reserve it, but now my nest egg and my children bonk grown to a fix that I truly don't demand a lot of shelter. But I did necessary it 20 geezerhood ago and by buying point I was able to buy a lot author indorsement when I truly necessary it.
Carl,I thought the napkin sketch was one of the best ones you've done! I agree with the article but wanted to add, or emphasize, two points.The first is that permanent insurance is the only choice for irrevocable life insurance trusts or for estate planning. Trustees have a distaste for the potential for the benefit to disappear. Variable is not permanent insurance, or at least most variable policies do not offer guaranteed death benefits.Second, I bought a Mass Mutual Whole Life policies for each of my daughters when they were born, $100,000 for $25 a month. Not a good investment, but with the death benefit increase rider they will probably never need to buy their own permanent product or worry about qualifying for life insurance due to unforeseen health issues. They are almost adults now and I'm very glad the policies were bought at an age where premiums are miniscule. My significant's nephew was diagnosed with juvenile diabetes, Type 1, a couple of years ago at age 4. Likelihood of him purchasing coverage later in life is either slim or very expensive.Great comments to your article and particularly Mickey Flagstaff's comment regarding the difference in the fiduciary standard for a CFP and the lack of one with an agent.
Good discussion points David."Then if you die before the term, the benefit is paid, and they keep the investment."By the investment, I assume you are talking about the cash value. You are absolutely correct, when you die, the death benefit is paid and the cash value is not. But let me ask you something, if you sold your home for $100,000 and you had $80,000 worth of equity, do you get $180,000? Better yet, if you buy a stock at $10 and it grows to $11, do you get $21 when you sell? No. Then why would you expect a whole life insurance contract to do the same?'Nothing like going to buy a car and paying cash!"This is a great way to explain the banking concept. Paying cash is one of the worst ways to purchase items, leasing being the worst. It's because of the lost opportunity cost. If you buy a car with $30,000 cash, you lose the potential that money could have earned you in the future. At the end of the term, the bank has your $30,000 plus interest and all you have is an older car.Then banking concept is simple. I take a $30,000 loan and pay for the car. Instead of making payment installments to a bank, I make it bank into my policy. At the end of my term, I have replenish the $30,000 and I have earned interest because the money never left my policy....and I have an older car. Lather, rinse, repeat.It has nothing to do with investing...but everything to do with financing.
Thanks for the reply maltipo.I think that anyone reading these posts needs to realize one thing. Ongoing fees for the investment portion of a whole life policy are 5% or so per year. There is no way you will end up better with whole life versus term + invest the difference over the short or long haul. That 5% drag compounded over the years will make you poorer and the company and agent richer. There is no magic in the complexity of the contract that will overcome this drag. Then if you die before the term, the benefit is paid, and they keep the investment. They win and you lose. Simple as that.Also, the idea that you can borrow from yourself and pay for big ticker items "so you pay yourself interest" is a well worn line by whole life agents. What it ignores you unplug a long-term equity investment that pays a higher return so you can invest in an investment (a loan to yourself) that pays a smaller return. When you do this, the company again wins because they keep the difference. I personally prefer having my real investments grow by not paying all those fees, so I can pay cash for things. Nothing like going to buy a car and paying cash!“There is a sucker born every minute” – PT Barnum
David, I'm glad there is some discussion here because I believe it's important to explore all sides of the story.You are right, the cost of premiums for a term policy are guaranteed...for the life of the term. Buying my policy at the age of 24 means I pay the same for my policy at ripened age of 60 and so on. If I were to get a term policy at that age, it will be extremely expensive...that is of course if I even qualify for a policy.Your "buy term and invest the difference" strategy assumes that I won't be touching my cash value. My policies function as a personal bank where I control the flow of money and finance my own big ticket items. I can recapture all the interest that I would otherwise pay financial institutions.Your example of the Vanguard Index 500 fund having an average annual return of around 8.5%. sounds tempting. But, there is a flaw in chasing averages. Here's an example. Let's say I invest $100 into your fund and I lose 50% in 1 year. I am left with $50. In year 2, I have a rate of return of 100%, bringing me back to my $100. My average rate of return is 25% ((-50%+100%)/2)...but I still end up with the same amount of money.You are right, I did purchase a disability rider...as well as a private disability insurance policy. They both protect me in case of a disability.The cash value is protected from creditors in case of a lawsuit. I don't plan on going bankrupt, but I can't control other people's litigious tendencies. And yes, I do also have a personal liability insurance policy (umbrella policy) as well.Ah, the 401k. You stated that the money is tax sheltered "until you begin your withdrawals". You'll find out that the taxes you have been sheltering for 30 years typically get paid back in 4 yrs of retirement. But forget 30 years from now. Ask around how people feel about their 401k today.(http://www.choose-financial-freedom.com/401k-retirement-plans.html) You are right...it's total hand waving. I waived bye bye to Uncle Sam's product a long time ago.I know about the hefty commission to my insurance agent. I know I ignored getting a match from my employer and still don't contribute to a 401k. I know term insurance premiums are cheaper...today. So the question is "why"? Why do I still love whole life insurance? It's because I know the value and the productivity this tool can produce."The problem in America isn't so much what people don't know; the problem is what people think they know that just aint so." - Will Rogers
Regarding maltipo who stated….“With my whole life policies, I can take advantages of the living benefits.- Cost of premiums guaranteed- Grows tax advantaged- Pays a dividend- Premiums are covered in case of disability- I can recapture all the premium costs- Cash value is exempt from creditors- The benefits beat any 401k (which is why I no longer contribute to one)”These are all tactics used by whole life sales people to confuse the fact that “permanent” life insurance is a terrible product. I’ll point out the stupidity of these sales bullets below.“Costs of premiums guaranteed”You can get the same thing with level premium term insurance…for much less.“Grows tax advantaged”“Pays a dividend”“I can recapture all the premium costs”These all say the same thing – that whole life is a “great investment”. FALSE!!!!!If a 30-year-old man has $100 per month to spend on life insurance and shops the top five cash value companies, he will find he can purchase an average of $125,000 in insurance for his family. The pitch is to get a policy that will build up savings for retirement, which is what a cash value policy does. However, if this same guy purchases 20-year-level term insurance with coverage of $125,000, the cost will be only $7 per month, not $100. WOW! If he goes with the cash value option, the other $93 per month should be in savings, right? Well, not really; you see, there are expenses. Expenses? How much? All of the $93 per month disappears in commissions and expenses for the first three years. After that, the return will average 2.6% per year for whole life according to Consumer Federation of America. Now instead, what if you invested the $93 you saved every month in the Vanguard Index 500 fund. The fund has no load and has an annual expense ratio of 0.18%. Assuming a tax rate of 35% for short term gains and 15% for long term gains, the average annual AFTER-TAX RETURN from 1929 thru 2009 (yes including the Great Recession) was 8.6%. If you look at a 20 year window from 1989 to 2009 (yes including the crash of 2008) then the annual return is 8.4%. Over 20 years, a 2.6% compounded annually produces total gain of 67%, whereas 8.3% compounded annually produces a gain of 393% over 7.4 times as much! The bottom line is that a no-brainer index fund kills the “growth” of whole life. Also, you actually have to make money for a “tax advantage” to mean anything, so with whole life unless your cash value exceeds the sum of all premiums you have ever paid, then there are no profits and hence nothing to “tax advantage”.“Premiums are covered in case of disability”Only if you buy a rider to do this which will cost extra. You can do this with term insurance too. If you do essentially you are buying a disability policy to cover your premium. What you should do is take some of the money you are wasting on whole life and buy a real disability income insurance policy that pays cash to replace your income so that you can pay all your bills. If you don’t have a real disability policy, but buy a premium coverage disability rider it’s likes buying “cancer insurance” but not buying comprehensive health insurance….and then having a heart attack!“Cash value is exempt from creditors”So let me get this, the plan is to buy this junk so I can plan to go bankrupt? Rather than planning to lose financially I’d rather plan to win by buying real investments. When you have cash you don’t go bankrupt. Also, by saving all that cash you can buy the proper property/casualty insurance (home, auto and umbrella) to eliminate risk appropriately.“The benefits beat any 401k (which is why I no longer contribute to one)”This is just a lie total hand waving. A good 401k frequently has a match and even if it does not it is completely tax sheltered until you begin your withdrawals. Also appropriate 401K investments options (majority in stock funds for anyone with 10 year left to work) will vastly outperform the bad returns a whole life policy will pay. 401K’s also always have much lower fees than whole life – the only difference is that the 401K will clearly tell you the fees are whereas the whole life will extract the fees by not adding any cash value for the first few years (that is the commission for the agent) and then the ongoing poor return is the result of the company pulling 5% or more per year out as fees (remember, the Vanguard 500 Index fund charges only 0.18% annually).
I guess my comments were in reaction to the article headline. Over the past several weeks, I have seen a number of articles advising people against getting permanent policies and giving reasons why they should not. However, under every single article, there are those actual clients that are commenting to the writer about their positive experience with their plans and that they are very happy that they did not follow the advise that the article is giving. I am an independent broker and do not represent just one single company so when I say that I try to get the very best for my client, I mean that. I too have helped clients untangle old UL products and don't use VUL products (risky). I help people with college funding. Believe it or not, there are some tremendous advantages for using a UL over the traditional savings plans. Is it beneficial for everyone, NO! It depends on the timing, health, income level, etc... Now I know that EVERYONE has their own experience and preferences in life. All that I am trying to communicate is that when you make a general comment about what something is or is not, you will have exceptions that contradict the point.Now Carl and everyone else, if you are targeting VULs, then I AGREE! If the client wants to be in the market, be in the market. For my purposes, I have to have the guarantees for my clients and their families. I said it before and will say it again, a good advisor should be willing to explain to the client what is available and FULLY disclose the pros and cons for what they are able to offer. Be blessed!
I am not emotional about financial products...but I happen to love my whole life insurance policies. To give some background, I am not in the financial services industry and I bought my first whole life policy when I was 24.But the looming issue here is term vs whole life insurance. (http://www.choose-financial-freedom.com/term-vs-whole-life-insurance.html) I have researched and less than 1% of al term policies pay a claim. That means you get your greatest return if you die on your way home after signing the papers.There is one benefit, the death benefit. Unfortunately, you have to die for this "benefit" to kick in.With my whole life policies, I can take advantages of the living benefits.- Cost of premiums guaranteed- Grows tax advantaged- Pays a dividend- Premiums are covered in case of disability- I can recapture all the premium costs- Cash value is exempt from creditors- The benefits beat any 401k (which is why I no longer contribute to one)Best of all, I can use my policies as a personal bank and recapture all the interest I would otherwise pay to banks.The fact is, rich people like Robert Kiyosaki, Donald Trump, and Warren Buffett, and large corporations like Wal-mart, and banks all utilize whole life policies. Why? Because they know the benefits that they can take advantage of today.I'm not saying to go out and buy whole life policies, but do your research. A tool is useless if you don't know how to properly use it.
A client once said to me "I feel that buying life insurance is the most self-less act one can do."oldtimer- great post! said what was on my mind!
Regarding oldtimer's (#15) comment..."No one wants to depend on renting a home for a lifetime due to lack of control. Buying a term policy is simply renting protection."Well, if I could rent a home for 15% the price of buying and invest the other 85% and end up with a whole lot more money than the house I would have bought was worth, then I would want to rent.That's what happens if you buy term and invest the difference in diversified no-load, low-fee index funds. I did this and over a 20 year period and I now have hundreds of thousands more in assets than I would have had if I had bought the “permanent insurance”. My term insurance will still be in effect until age 70, should I decide to keep it, but now my nest egg and my children have grown to a point that I really don’t need a lot of insurance. But I did need it 20 years ago and by buying term I was able to buy a lot more protection when I really needed it.Also, a point no one mentioned is that if you buy "permanent insurance" and you die, they pay the death benefit.... just like term.....and then they keep that investment part....which payed dirt anyway. With term if you die they pay the benefit and then all that money you saved by not buying term and invested has grown into a handsome nest egg for your family.
Let's not forget that an insurance salesman has a legal obligation to represent her insurance company while an independent planner has a fiduciary responsibility to the client. Beware a relationship where the salesman obfuscates how and how much they are paid. This can be a serious issue with permanent life policies while never as much of an issue with term. This is an aspect of permanent life policies that needs to be out in the open.
I love this sketch because my husband I have been trying to wade through the life insurance question. Thanks for getting us headed in the right direction (just term insurance). Now we have to figure out what that magic number is!
I had to chuckle a little when I read Mr. Richard's comment about life insurance not being for a "tax free loan later in life." Boy if I could count the times I have been sold that one. In fact in my younger (more ignorant years) I bought it hook line and sinker. I ended up with very expensive VUL policy that performed poorly as an investment and totally sucker punched me on fees. Finally I found an advisor (two different advisors actually) who convinced me, despite my years of investment in the VUL, to ditch the VUL and buy two tiered term policies, one for ten years and another for twenty years and invest the difference. What a difference, I am well insured and my investments are outpeforming what the VUL was doing, and in addition to that the total fees I am paying are cut by 50%. Thanks for setting people straight Mr. Richards.
As A CLU may I add one more thought. No one wants to depend on renting a home for a lifetime due to lack of control. Buying a term policy is simply renting protection. Remember it is the only investment I can think of that is payable income tax free no matter how profitable and is a more valueable love letter to the beneficiary than anyone can imagine. It is also a fact that I have never paid a death claim in which the insured had more invested in premium than the death benefit. Not an investment; think again.
Carl,I'll keep this really short and sweet. As you said, "life insurance is something most of us need but no one wants to talk about." Consequently the industry has come up with all these ways to explain how it serves other purposes as well. "Once we are clear on the purpose, buying the right type of insurance becomes much easier." I think many planners are unclear about what they do for a living. What's so shameful about selling life insurance instead of trying to package it as something that it isn't?Seth Godin describes a "Meatball Sundae" as "the unfortunate result of mixing two good ideas." I think this analogy is a very relevant to the many ways that life insurance is sold today.
I'll second Russ's comment: "And when you only have one tool, let's call it a hammer, everything looks like a nail."To continue the analogy, when you have an entire specialized tool set available to you (i.e. term-life for economic loss, low cost investments for retirement, 529's for education, etc.), there's no need for the utility tool that can do everything but doesn't do it that well.
DeWayne-I am glad to hear it has worked for you in your practice but my experience has been much more like David's (#10).I have spent an aweful lot of time over the last 15 years helping people unwind complex insurance plans they were sold that just never worked out like the projections they were shown. I realize that there are a lot of variables that go into making a complex insurance plan work out, but my experience has led me to the conclusion that life insurance is to protect against the economic loss that can come with the death of a loved one.If you want to save for a future financial goal use the low cost tool made for the job...investments.
While Carl's post addresses some of the use cases for term vs permanent insurance, his main point, with which I agree, is that "Life Insurance Is Not An Investment".Many of the comments are critical of Carl's article, but they're arguing about when, how and why to use Life Insurance, and not addressing Carl's main point.So I'll repeat it: Life Insurance Is Not An InvestmentUnfortunately, many (though certainly not all) insurance agents/brokers, some of whom I suspect have commented above, use Variable or Universal Life as if it's the only tool in their tool box. And when you only have one tool, let's call it a hammer, everything looks like a nail.Yes, I'm pointing some fingers here.The problem I have is when "Life Insurance" is sold to consumers as a cure-all tonic for whatever problem or issue they might have.I also agree with Carl that there are circumstances when permanent insurance is called for, but these are much less often than typical insurance agents would lead people to believe.If a person lives within their means and saves for their future, then their life insurance need should decline over time. With permanent insurance, even if sold as an investment, you'll be paying the insurance "costs" for the life of the policy, even if you reach a point where you no longer need or want the insurance piece.As with all things, buyer beware.And one more time for those who missed Carl's headline: Life Insurance Is Not An Investment.
I am now 50. When I was 30 and had just started a family I purchased a $1,000,000 term policy that was renewable until age 70. The agent tried to sell me whole life or one of its variants (variable, universal, etc.). His pitch was that the "savings" would grow tax free. Instead I purchased Vanguard Index funds with the difference. Since index funds have very low turnover (5% or less), they produce minimal annual tax obligations. Also Vanguard funds have annual fees of 0.2%, or so which drop to 0.1% or so once you hit the "Admiral Level" of $100,000. By investing the differential amount (the term cost was about 1/4 the whole life cost, so 3/4 was available for investment), I have a much larger nest egg than I would have had with a whole life policy and I can use it any way I see fit without having to "borrow it". Syndicated radio host and NY Times best selling author Dave Ramsey is right on when he says that Whole Life, Variable Life, Universal Life and Return of Premium (the latest twist) are all "horrible investments". He dislikes them so much that he usually says "horrible investments" with a fake vomiting sound at the end. They are purposefully complicated to confuse the fact that they are bad investments. Any young person would serve their family best by buying level premium term renewable for at least 30 years and then investing the difference in no-load, low annual cost index funds with Vanguard or the Fidelity Spartan funds.Also, to Mark who stated "Try to renew a term policy after you have acquired a medical condition, and you might wish you had bought whole life", my question is why did you not buy renewable without proof of insurability term? That's what I bought at age 30 renewable to age 70.
Carl, although I agree with your comment about variable life insurance (risky), I am amazed that you have down played all of the other various uses of life insurance policies.Your comment: "It’s not for education savings. It’s not for retirement savings, or to provide a tax-free loan later in life. No matter how much you buy (or are sold) it will never replace an emotional loss.", is only partially true. Insurance will never replace and emotional loss, neither will assets under your management, bank accounts, stocks, bonds, etc... As a CFP, to suggest that utilizing properly structured plans for college funding or supplementing retirement funds as not being valid or beneficial is interesting. I have successfully helped families for years in utilizing life insurance for those two areas in particular. The life insurance just simply performed much better than your more traditional methods.You also say that using permanent insurance is the exception and not the rule for only a few reasons. Again, many more people could benefit from properly structured plans and they don't have to be wealthy.Carl, you certainly are entitled to your opinion but my experience has proven to me and my clents that life insurance has far greater value than just being a simple term policy. I don't know how many of the previous posters are involved in the financial services industry, but their comments speak to some of the exact problems of advising a person to only consider term policies. They do have their place but they are not the only plans that the vast majority of us need to consider as you suggest.
Carl, I'll keep this one simple. I agree with joussoucy, permanent insurance does have it's place. It really depends on the person's goals. I am also a broker and have helped many families to successfully fund their children's education at the same time set up being able to supplement their retirements through insurance products.To Evitzee, I am sorry that a particular advisor tried to steer you to that type of policy. It does not make sense if you were close to retirement. How did he/she expect you to fund it? As far as rates go, it really depends on age and health class. I am currently working with a 53 year old that absolutely does not want term and is only interested in permanent. A 30 year term rate is 20/month less than a permanent insurance rate for the same coverage. Keep in mind that there are many people that have not financially secured their future to just drop an insurance policy when they reach a certain age.There is a place for both term and permanent. A good advisor/consultant/planner should be able to point out the advantages and disadvantages to their prospective clients. Insurance is not a "one size fits all" industry.
All things being equal Carl Richards is correct; term life insurance makes the most sense. I retired last year at 59 and was still eligible for term insurance from my company at 1 to 5 times my salary level at group rates until age 70 at which time I will no longer need protection. I had one 'advisor' try to steer me into a $1,000,000 whole life policy on the basis that this insurance was a legitimate 'asset class'. It was nonsensical to pay a $25,000 yearly premium for whole life insurance. Another said they could beat my companies rates for the term insurance. After the physical they weren't even close to beating the insurance I already had. For those that have access to term insurance keep it as long as you need it; it gets more expensive as you get older but it is still the cheapest way to go. You don't think of your home, car insurance as a way to build your investment nest egg, neither should you think of whole life as an investment option unless you are completely shut out of the cheaper options. It is amazing how the whole life industry has completely hazed over the concept of insurance and made whole life the best way to invest in their minds. Don't believe it.
Permanent insurance is needed in more places than it isn't, Mark's point is the biggest reason. People are living longer now than ever before, more and more term policies are coming due with people unable to renew for financial reasons. Now, this is ok in the scenario where it comes due and the family has met or exceeded their financial goals and are now in ideal financial condition. the problem, however, is that scenario has not in my experience been the most common. Its impossible to predict exactly what our future is going to look like. For this reason, I believe it is important to always have at least a small base of permanent insurance (so final expenses will always be covered) and supplement that with enough term to cover "economic loss" which should also include loss of income.I'm am an insurance broker, and I have seen an increasing amount of requests to insure 70-80 years who are insurance-less and have medical problems. Trust me, that is not the time to be buying life insurance.And as for the investment side, In Canada you are only allowed to contribute a maximum of $5000 to a tax-free savings account per year. Inside a universal life policy is a great place to store cash and enjoy tax-free investment growth. I could show you many scenarios in which the overall returns from the tax free growth far outweigh the additional MER related to the seg funds.@joshsoucy
If you bought a whole life policy 35 or 40 years ago, that policy has been paying its own premiums for 20+ years, and in our case is now worth enough to cover a year at the highest level of care in a care facility. Much better investment than my mother's long term care policy, into which she has now paid more than they will ever pay out in premiums. Not as good as properly timed stock investments or T-bills, of course, but those don't come with insurance.