Whole Life Insurance

[Fuerza]

I've always had term life insurance through the military. I'm leaving service soon and my insurance will end when I leave service. I can elect to start Veterans group life insurance which sounds a lot like my current Servicemans group life insurance.

A friend of mine sells insurance and was telling me about whole life insurance.

Term insurance is pretty straight forward to understand. Whole life sounds a lot complex and more of an investment than insurance. All of the celebrity investors i.e. Suze Orman, Dave Ramsey ect hate Whole Life Insurance.

Can anyone educate me more on Whole Life Insurance?

 

[Matt]

• Term Life is a rented policy, it covers you for a period of time, commonly 30 years. If you outlive it, the policy expires and you have nothing.
• Whole life is a purchased policy, it has a similar period of time where you pay into the policy, but at the end of the paying in time you own the policy.

Whole life isn't an 'all or nothing' thing, your payments (after the first few years) start building up a cash value within the policy, the cash value is the part you 'own'.

Theoretically people like the idea of whole life because they don't want to pay into something for years and it be worthless, it feels like wasted money. However, there is a disconnect between the money you pay into a Whole life and what your cash value it.

Rough example (numbers totally made up)

• $500K Term policy, $800 per year premium
• $500K Whole life $8500 per year premium

• At the end of year 1 you pay $8500 to Whole life, how much is your cash value?
• At the end of year 30 you have paid in $255,000 to Whole life, how much is your cash value?

Many would say that having a cash value of say.. $260K after 30 years would be great, because it means your premiums are free, however, this is where it gets tricky...

If you took $7800 ($8500-800) and invested it over 30 years, what would the value of that investment be?

Even with just a 1% rate of return, the $7800 would have grown to $274K. If you had a 5% rate of return the $7800 would have grown to $544K.

So the whole thing that you are experiencing from a 'FRIEND who sells life insurance' is that they are playing on your desire to not lose the premiums paid and get your money back/maybe a profit at the end of this all. The angle is that the life insurance company your friend works for takes a big slice out of your future returns and creates a premium:cash value ratio that is less than ideal.

Whole life does have some application, but it is not for life insurance (IMO) it is for some elaborate estate transfer stuff that involves large sums of money. The Whole life your friend is suggesting to you is just a bad investment, and you'd do better with some good Term from AARP or another reputable lender. I don't know it, but I'd imagine Veterans group life insurance is solid too.

PS Suze Orman and Dave Ramsey are really not that sharp about investing.

 

[Someone]

Adding to what Matt wrote... the phrase is "buy term, invest the difference". It has its own Wikipedia page (for good reason).

 

[Fuerza]

Matt thanks for the explanation. I see things similar to what you just said. In that I could put smaller amounts of money into a term policy and invest the difference. My friends policy offers a 3% return. The monthly payments are high compared to my current term policy, but he explains that eventually the money I put into the whole life policy I'll get back.

I've never heard of anyone really saying whole life policy's are a "good deal" other than salesman but I don't know enough to say otherwise. I'm trying to understand an scenario where it would be a good idea? I don't know.

To me life insurance isn't an investment. If I live long enough my children will be taking care of themselves, my home will be paid for and wife will money saved away.

 

[Matt]

I've never heard of anyone really saying whole life policy's are a "good deal" other than salesman but I don't know enough to say otherwise. I'm trying to understand an scenario where it would be a good idea?

If you were above the 10.9M portable exemption limit you could create a trust for the benefit of your decedents. The trust could buy life insurance through annual gifting of $14K, split gifting of $28K per covered person in the trust. This would allow you to divert money that would otherwise be subject to estate tax into trust, where upon your death it would create a 'corpus' which would then be used to provide for your future generations of munchkins.

 

[kodiak jack]

I've always had term life insurance through the military. I'm leaving service soon and my insurance will end when I leave service. I can elect to start Veterans group life insurance which sounds a lot like my current Servicemans group life insurance.

A friend of mine sells insurance and was telling me about whole life insurance.

Term insurance is pretty straight forward to understand. Whole life sounds a lot complex and more of an investment than insurance. All of the celebrity investors i.e. Suze Orman, Dave Ramsey ect hate Whole Life Insurance.

Can anyone educate me more on Whole Life Insurance?

Matt hit it nicely; I'll add a bit as well.

Knowing the insurance economics from both sides of the coin (i'm an actuary who knows the calculations for setting insurance pricing, and my wife is a financial advisor who sells insurance), I can reiterate that whole life is a terrible rip-off. Please, do not do it! I've never seen a situation in which someone I know should buy whole life insurance. There are a few very rare exceptions (matt details one), but you are certainly not the exception.

The reason advisors push whole life instead of term, contradicting the best interests of their clients, is that the commissions they receive are orders of magnitude higher (e.g. commissions in the thousands on whole life vs a commission of <$100 for term, using some reasonable assumptions.) Note that you will never SEE the commission come out of your own pocket; you don't write a check to the financial advisors for $2500 to pay them a commission. But you'll write a fat check every month or year and the commissions and fees are buried where you won't see them. But you will pay them.

Don't buy whole life.

 

[projectx]

There's a reason those in the financial business push whole life policies; it pays big commission. I'd ask your friend why he would push that garbage on another friend, and then politely tell them where to shove it.

 

[Someone]

There's a reason those in the financial business push whole life policies; it pays big commission. I'd ask your friend why he would push that garbage on another friend, and then politely tell them where to shove it.

Same goes for most annuities. Do not buy.

 

[Cliffbar]

I'll also add that 80% of whole life policies lapse in the first 30 years .

 

[PurpleSquirrel]

I had a conversation with a NorthWestern mutual insurance agent , 2 years ago. He was adamant about whole life insurance and said it was way better than term life. After engaging for an hour, I finally threw him a bone. Told him I can buy whole life policy if the difference between whole life and term premiums returns from NW can beat the S&P 500 annual returns.

He went back to his office and researched about it. The next time, he meekly said that NW invests the difference in index funds and they basically charge you for the convenience. Suggest you do the same thing with your agent.

 

[Dunkin Donuts]

I've always had term life insurance through the military. I'm leaving service soon and my insurance will end when I leave service. I can elect to start Veterans group life insurance which sounds a lot like my current Servicemans group life insurance.

A friend of mine sells insurance and was telling me about whole life insurance.

Term insurance is pretty straight forward to understand. Whole life sounds a lot complex and more of an investment than insurance. All of the celebrity investors i.e. Suze Orman, Dave Ramsey ect hate Whole Life Insurance.

Can anyone educate me more on Whole Life Insurance?

First off- Whole life insurance is not an investment. It's an insurance.
Second- Before deciding what type, do you know how much you should have?

 

[kodiak jack]

First off- Whole life insurance is not an investment. It's an insurance.
Second- Before deciding what type, do you know how much you should have?

whole life is an insurance plus an endowment (essentially a forced savings plan with an investment component.)

 

[Matt]

First off- Whole life insurance is not an investment. It's an insurance.

Why does it cost considerably more than Term Life insurance?

Second- Before deciding what type, do you know how much you should have?

Why is that relevant?

 

[Dunkin Donuts]

Why does it cost considerably more than Term Life insurance?



Why is that relevant?

Whole life has a higher premium because its not a question of *if* the insured will die, rather, a question of when.
Term life only has the question - "what if"
Less likely to happen during the life of the policy.


The right amount of insurance is a more important first step than what type.

 

[Matt]

Whole life has a higher premium because its not a question of *if* the insured will die, rather, a question of when.
Term life only has the question - "what if"
Less likely to happen during the life of the policy.

Most people insure for the purpose of a 'what if'. The insurance industry sells on the concept of 'what if'. If you remove the what if and it becomes a 'sure thing' then the purpose changes, and therefore it is different. If the purpose is different (an expenditure for the surety of death, rather than the chance of death occurring when it is not ideal) then what is the purpose of Whole life insurance, and why should someone elect it over Term, which covers the 'not ideal/could ruin all plans' part of life?

The right amount of insurance is a more important first step than what type.

The correct amount of life insurance is without doubt critically important, but what does that number mean to the discussion between Whole and Term? If an amount matters, at what number is Term preferable over Whole, and vice versa?

 

[Dunkin Donuts]

Most people insure for the purpose of a 'what if'. The insurance industry sells on the concept of 'what if'. If you remove the what if and it becomes a 'sure thing' then the purpose changes, and therefore it is different. If the purpose is different (an expenditure for the surety of death, rather than the chance of death occurring when it is not ideal) then what is the purpose of Whole life insurance, and why should someone elect it over Term, which covers the 'not ideal/could ruin all plans' part of life?



The correct amount of life insurance is without doubt critically important, but what does that number mean to the discussion between Whole and Term? If an amount matters, at what number is Term preferable over Whole, and vice versa?

Was pointing out that the right number is important. Did a search here and found nothing on it.

Whole life obviously serves a purpose that is not just addressing the same issue as Term.
If it did, then what's the point of it?

 

[Josh F]

Was pointing out that the right number is important. Did a search here and found nothing on it.

Whole life obviously serves a purpose that is not just addressing the same issue as Term.
If it did, then what's the point of it?

IMO, it's geared toward people who don't want to "throw away their money" with a term plan, they'd rather invest and have a return, so it's a good sales pitch. I ran some numbers years ago when I was told to buy it, but from what I found you're just better with a term plan and investing the difference. I know a lot of people who make financial advice NOT based on the best financial decisions because of a multitude of reasons (emotional being #1)

 

[Matt]

If it did, then what's the point of it?

Could you tell us what the point of it is?

 

[Dunkin Donuts]

Could you tell us what the point of it is?

It can be used for many purposes.
However- it's not a one size fits all.
Some people should buy Term, some should buy Whole life. There is no blanket rule that everyone should buy one. Each person's circumstances are different.

The people that are saying to buy term and invest the difference are not showing you net numbers. They are showing a best case scenario, if the market acts like we hope it should, you will have x amount of dollars. But, that does not take outside factors into account (eg. taxes, risk etc.).

Don't think of Whole life as an investment.
It's not meant to make you 8-9% on your money. It acts more like a bank account with a nice % of growth.

Again- its not for everyone, and there's a reason why premiums are higher than Term.

 

[Matt]

There is no blanket rule that everyone should buy one. Each person's circumstances are different.

If there isn't a blanket rule, is it random? There must be a factor that is important?

The people that are saying to buy term and invest the difference are not showing you net numbers. They are showing a best case scenario, if the market acts like we hope it should, you will have x amount of dollars. But, that does not take outside factors into account (eg. taxes, risk etc.).

Agreed, investing the difference can involve returns that are not guaranteed.

Don't think of Whole life as an investment.
It's not meant to make you 8-9% on your money. It acts more like a bank account with a nice % of growth.

If it isn't an investment, and not made to make 8-9% return, and is more like a bank account, what is the guaranteed % growth?

Again- its not for everyone, and there's a reason why premiums are higher than Term.

What is the reason?

 

[Josh F]

The premium

It can be used for many purposes.
However- it's not a one size fits all.
Some people should buy Term, some should buy Whole life. There is no blanket rule that everyone should buy one. Each person's circumstances are different.

The people that are saying to buy term and invest the difference are not showing you net numbers. They are showing a best case scenario, if the market acts like we hope it should, you will have x amount of dollars. But, that does not take outside factors into account (eg. taxes, risk etc.).

Don't think of Whole life as an investment.
It's not meant to make you 8-9% on your money. It acts more like a bank account with a nice % of growth.

Again- its not for everyone, and there's a reason why premiums are higher than Term.

Sorry, but those are pretty steep premiums for a bank account...

 

[Someone]

Why does it cost considerably more than Term Life insurance?

It (whole life) costs more because the insurance companies like to make money!

The only times I've heard of whole life really making sense were for purposes other than the death benefit (i.e. UHNW individuals or couples with very fancy estate plans).

 

[Matt]

It (whole life) costs more because the insurance companies like to make money!

The only times I've heard of whole life really making sense were for purposes other than the death benefit (i.e. UHNW individuals or couples with very fancy estate plans).

I've heard of this.

 

[Dunkin Donuts]

If there isn't a blanket rule, is it random? There must be a factor that is important?



Agreed, investing the difference can involve returns that are not guaranteed.



If it isn't an investment, and not made to make 8-9% return, and is more like a bank account, what is the guaranteed % growth?



What is the reason?

Yes, its not random. Need to see everything the person is doing. You can't measure option A vs. B without seeing the entire picture.
There are benefits for the insured even when he's alive.
Use of money that he would not have necessarily used, or been able to use.

 

[Matt]

Yes, its not random. Need to see everything the person is doing. You can't measure option A vs. B without seeing the entire picture.

Is there a checklist or guideline for this?

There are benefits for the insured even when he's alive.
Use of money that he would not have necessarily used, or been able to use.

Is that insurance?

 

[Dunkin Donuts]

It (whole life) costs more because the insurance companies like to make money!

The only times I've heard of whole life really making sense were for purposes other than the death benefit (i.e. UHNW individuals or couples with very fancy estate plans).

Lets not be silly.
A Honda costs less than a Maserati not just because the company wants to make more money.
They both seem to get a person from point A to point B
But you know there's more to it.

 

[Someone]

Lets not be silly.
A Honda costs less than a Maserati not just because the company wants to make more money.
They both seem to get a person from point A to point B
But you know there's more to it.

I'm not being silly. It sounds like you either sell the stuff or got tricked into buying it and want to justify the purchase.

In all cases you wind up dead and your beneficiaries get some money. You can't drive around in your insurance policy to show off how rich you are. Insurance is not (supposed to be) a luxury good and your comparison is what's silly here.

Read (or re-read) the second post on this page by Matt - he covered it very well.

 

[Dunkin Donuts]

Is there a checklist or guideline for this?



Is that insurance?

Yes there is.
Surely you expect me to share my processes and checklists.

Lets call it cake.
The product operates the same no matter what name you call it

 

[Dunkin Donuts]

I'm not being silly. It sounds like you either sell the stuff or got tricked into buying it and want to justify the purchase.

In all cases you wind up dead and your beneficiaries get some money. You can't drive around in your insurance policy to show off how rich you are. Insurance is not (supposed to be) a luxury good and your comparison is what's silly here.

Read (or re-read) the second post on this page by Matt - he covered it very well.

His numbers were made up (as he said) just to give a picture what the premiums look like

 

[Matt]

Yes there is.
Surely you expect me to share my processes and checklists.

That would be great! You can upload checklists and such via the upload a file tab.

Lets call it cake.
The product operates the same no matter what name you call it

Let's not. You said it was called insurance.

What is insurance?

 

[Someone]

Now I realize I left something out... Whole life is more expensive so the producers can eat cake and drive Maserattis!

 

[Dunkin Donuts]

That would be great! You can upload checklists and such via the upload a file tab.



Let's not. You said it was called insurance.

What is insurance?

Sorry Matt, no can do.

 

[Dunkin Donuts]

Take Matt's example..
Say you invested the 7800 and paid 800 for Term insurance. What have you accomplished? Threw out about 10% of what you put in

 

[Matt]

Sorry Matt, no can do.

Pretty hard to defend a position without transparency.

 

[Matt]

A follow up question:

How much does a $1m whole life policy charge in fees and of which what are you paid in commission over the first 10 years.

Vs

The same for $1m term

I wonder if the difference between the two could influence the recommended policy, since the checklist or guidelines for what is appropriate is not readily available?