Author Topic: Why Whole Life / Universal Life Insurance Is A Bad Idea  (Read 51640 times)

arebelspy

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Why Whole Life / Universal Life Insurance Is A Bad Idea
« on: June 24, 2013, 10:17:45 AM »
So a week or two ago a life insurance salesman came onto the forums asking why mixing Life Insurance and Investing was bad.

They go by a variety of names (e.g. an EIUL, Indexed Universal Life, Whole Life, etc. etc.) but the bottom line is you combine life insurance and investment into one vehicle.   Supposedly you get amazing returns, tax benefits, and it beats the stock market (according to the people selling it).

This salesman seemed to genuinely be asking why it was a bad idea - he didn't get it.  So after we explained, and gave some decent reasons why it is almost always bad idea for the individual (but great for the life insurance company), he disappeared, along with the thread.  I think he got embarassed about how badly the idea got ripped apart, and deleted it.  It's a shame, because I'd have liked to use it as a reference for newbies asking about Whole/Universal Life.

In any case, I ran across this article today and wanted to post it here so I didn't lose track of it.  It has some great arguments about why Whole Life is a terrible idea (and almost all, or all of, the same arguments apply to Universal Life as well).

http://momanddadmoney.com/2013/06/why-whole-life-insurance-is-a-bad-investment.html

In summary, the reasons given are:
  • Whole life insurance is undiversified
  • Whole life returns are not guaranteed
  • Positive returns take a long time to appear
  • Whole life insurance is illiquid
  • Less cash flow flexibility
  • The claim of “tax-free” withdrawals is misleading
  • Lack of transparency in fees. Complicated terms and conditions.
  • There are plenty of other options available

Each reason is explained, of course.

Enjoy!
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mbecker

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Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #1 on: June 24, 2013, 02:37:18 PM »
Thanks for sharing the article! I'm glad you found it helpful.

destron

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Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #2 on: June 24, 2013, 03:00:58 PM »
Thank you for this. I had to go over this with a coworker of mine a few months ago who is already 5 years into a whole life policy for himself but was looking into getting one for his infant son. Fortunately, I was able to talk him out of it and gave him some other, better options for college savings.

And really, if your child dies, what good is life insurance going to do you?

arebelspy

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Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #3 on: June 24, 2013, 03:34:40 PM »
Thanks for sharing the article! I'm glad you found it helpful.

Sure, thank you for writing it!  It's something I'll definitely be linking people to.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

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Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #4 on: June 24, 2013, 03:41:20 PM »
This salesman seemed to genuinely be asking why it was a bad idea - he didn't get it.  So after we explained, and gave some decent reasons why it is almost always bad idea for the individual (but great for the life insurance company), he disappeared, along with the thread.  I think he got embarassed about how badly the idea got ripped apart, and deleted it.  It's a shame, because I'd have liked to use it as a reference for newbies asking about Whole/Universal Life.


Don't count on it that he had a second thought.  I think a lot of these guys truly see it as a good idea.  My dad's best friend sold him 5 of them (one on each of the kids, for chrissake) and seriously thought he was giving dad great advice.  I had to argue for years to get him to cash mine out.  YEARS.... like 20 or more.   I still think the buddy that sold the policy thinks I was insane for making him do it.

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Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #5 on: June 24, 2013, 07:16:31 PM »
I wholeheartedly agree the 'whole life' policies are a sham----(here it comes)

BUT they can kick ass for trust/asset/generational transfer when you're well into the death-tax range(s) [2m++] and can do a wonderful job shielding an inheritance for heirs. Very common vehicle to put a whole life in a trust for that purpose. I'm not an estate attorney so I dont know if there are alternatives or what particular merit this one corner-case has, just wanted to mention I hear this one a lot too.

pom

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Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #6 on: June 25, 2013, 02:35:42 AM »
I also think that in most cases whole life is a bad idea.

However your analysis seems to ignore the death benefit part. When you mention that the annual real return after 40 years is 0.74%, it seems to me that you did not include the benefit of insurance.

Not including the benefit is like saying that you should not take medical insurance because you don't expect to get sick. Medical insurance has a -100% return if you don't get sick but you will agree with me that this is not the way that you calculate return on insurance.

You say for exemple: "For the first decade or so, you are almost guaranteed to have negative returns. This means you can’t even expect to get back the amount of money you put in." That is  untrue if you die, your heir will get many times what you put in. To understand life insurance in general you need to understand the concept of value at risk (VAR) and look at the mortality tables to see what protection your insurer is providing. That protection is part of your return.

My concern with Whole Life are the fees not related to the insurance part. I think that the main problem is that it is a product that need tons of marketing to sell, thus they need to charge tons of fees to recoup these costs. I also don't like that it is a hybrid investment/insurance which makes it less transparent due to the added complexity. Better buy term for insurance and invest the difference in bonds.

For a full disclosure, I am an actuary specialized on pension plans. I never worked for an insurance company but I studied insurance pricing at university and had to study it again for my qualification exams. I may work for insurance companies in the (near?) future, still I don't think my analysis is biased by that.

mbecker

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Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #7 on: June 25, 2013, 04:14:30 AM »
However your analysis seems to ignore the death benefit part. When you mention that the annual real return after 40 years is 0.74%, it seems to me that you did not include the benefit of insurance.

Thanks for your input. Perhaps I should have been clearer in the article, but the point here was to evaluate whole life insurance as a retirement vehicle, which is how it's often sold to young people. With that lens, the death benefit is irrelevant as it is not available for you to spend during your lifetime.

When you compare life insurance to medical insurance, or talk about the fact that your beneficiaries would get many times your investment if you die within the first few years, you are confusing the concepts of investing and insurance. I believe that life insurance is a critically important part of financial planning, and have written as much several times. But you can get that insurance coverage at a much lower cost (as much as 10 times lower) with a term policy and have the premium difference available to you to invest in much more attractive ways.

You do actually recognize this when you say:

My concern with Whole Life are the fees not related to the insurance part. I think that the main problem is that it is a product that need tons of marketing to sell, thus they need to charge tons of fees to recoup these costs. I also don't like that it is a hybrid investment/insurance which makes it less transparent due to the added complexity. Better buy term for insurance and invest the difference in bonds.

This is exactly the point. The non-insurance part of it is typically a bad deal for the policy owner. And on top of that, the insurance that most people need can be had for much cheaper.

Now, if your goal is to pass on money to your heirs no matter what and/or help with estate taxes as Joet mentioned, then whole life can be a good product for that specific purpose. But you can purchase a 30 year term policy when you're young and starting your family, which gives you the insurance protection you need at a fair cost, and have the option to convert some or all of it to whole life at any point during that term if the insurance need for whole life truly becomes important for you. There's no reason to unnecessarily tie up your money in a poor investment vehicle for decades without knowing if the insurance component of the product will truly be valuable for you.

pom

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Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #8 on: June 25, 2013, 04:31:06 AM »
I am on board with you that the best option is term life and investments on the side. That is what I am doing for myself.

I just wanted to point out that the protection that you get has some value to it. By no mean do I disagree with your conclusion, I am just a bit anal retentive on my field of work ;)

workwheniwantto

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Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #9 on: June 25, 2013, 11:24:08 AM »
I unfortunately spent over 30 hours trying to determine whether it could be a good deal since someone seemed so sure of it.  In the end, my gut told me it was a bad deal, and nobody could even offer me the information I needed to make an informed decision so that is how I left it. 

That said, what I did learn is that the commissions for the sales and the insurance cost is very frontloaded.  While I believe it is a very bad investment to get, it may be worth keeping if already "trapped" since they start giving a decent rate of return (on top of the insurance) once several years go by, at least it seemed to in the fund presented to me.  I just forget how many years - 5 or 10 years.  Of course, I did not do heavy analysis on that situation, since I never wanted to put myself in the position of "I should keep this really bad overall deal because it has just started being slightly better than average one at the margin where I have placed myself." 

Spork

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Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #10 on: June 25, 2013, 01:02:50 PM »
I unfortunately spent over 30 hours trying to determine whether it could be a good deal since someone seemed so sure of it. ...

I think a good rule of thumb with investments is: they shouldn't be hard to understand. 

There are surely some exceptions to that rule, but minimally: If you don't understand it, don't do it.

mbecker

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Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #11 on: June 26, 2013, 02:39:57 PM »
If you want some more evidence that it's a bad idea to mix insurance with investing, check out this article by Michael Kitces: http://www.kitces.com/blog/archives/561-AXA-And-Hartford-Prospectus-Changes-A-Troubling-New-Trend-For-Existing-Variable-Annuities.html

Basically, insurance companies issued a large number variable annuities with guaranteed withdrawal benefits between 2003 and 2008. After the market crash in 2008, these companies realized that they couldn't/didn't want to fulfill those guarantees and now are finding incredibly sneaky ways to get out of those guarantees. One company, Hartford, has even gone so far as to require their policy holders to make certain changes to their investment allocation by a deadline of October 4, or else their GUARANTEED withdrawal benefit will be canceled.

Except in very rare circumstances, insurance and investing should be kept separate. When an insurance company can legally renege on their "guarantee", what more evidence do you need?

momentumrisk

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Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #12 on: June 28, 2013, 08:31:00 AM »
    So a week or two ago a life insurance salesman came onto the forums asking why mixing Life Insurance and Investing was bad.

    They go by a variety of names (e.g. an EIUL, Indexed Universal Life, Whole Life, etc. etc.) but the bottom line is you combine life insurance and investment into one vehicle.   Supposedly you get amazing returns, tax benefits, and it beats the stock market (according to the people selling it).

    This salesman seemed to genuinely be asking why it was a bad idea - he didn't get it.  So after we explained, and gave some decent reasons why it is almost always bad idea for the individual (but great for the life insurance company), he disappeared, along with the thread.  I think he got embarassed about how badly the idea got ripped apart, and deleted it.  It's a shame, because I'd have liked to use it as a reference for newbies asking about Whole/Universal Life.

    In any case, I ran across this article today and wanted to post it here so I didn't lose track of it.  It has some great arguments about why Whole Life is a terrible idea (and almost all, or all of, the same arguments apply to Universal Life as well).

    http://momanddadmoney.com/2013/06/why-whole-life-insurance-is-a-bad-investment.html

    In summary, the reasons given are:
    • Whole life insurance is undiversified
    • Whole life returns are not guaranteed
    • Positive returns take a long time to appear
    • Whole life insurance is illiquid
    • Less cash flow flexibility
    • The claim of “tax-free” withdrawals is misleading
    • Lack of transparency in fees. Complicated terms and conditions.
    • There are plenty of other options available

    Each reason is explained, of course.

    Enjoy!

    Thank you for sharing.  There are indeed some pros and cons to Whole Life and other permanent life insurance contracts.  The summary provided on the list above is not 100% accurate, albeit to be fair there is greater detail behind the summary list above on the blog post.
    Permanent Life Insurance is not meant for everyone...Financial products are great when used properly, but are terrible when abused by pushy salespeople. 
    It seems like a greater number of middle income consumers buy whole life or other permanent life insurance.  Which could be part of the problem.  If a middle income consumer lost their job they might not have enough cash flow, like a high net worth individual might to continue making premium payments.  This can be very costly.

    • Whole life insurance is undiversified
      There is NO market risk, the insurance carrier is assuming the market risk on behalf of the consumer.
    • Whole life returns are not guaranteed
      There generally is a guaranteed rate of return, like 4%.  While you delve a little further on the blog there is a guarantee.  Dividends or 'return of premiums' are not guaranteed.
    • Positive returns take a long time to appear
      It depends on the policy design, the investment performance of the insurance carrier, operational efficiency, etc.  Permanent Life Insurance is meant to be a long term 'hold' strategy, especially when you consider the name, "WHOLE LIFE"......It is meant to provide death benefit protection for your entire life, assuming premium payments are made.
    • Whole life insurance is illiquid
      It is not liquid like other financial products.  The cash value, while it can be borrowed via loans is not the consumers money.  It is the Life Insurance carriers reserves to pay future death benefit claims.
    • Less cash flow flexibility
      It depends on the consumer
    • The claim of “tax-free” withdrawals is misleading
      I tend to agree, proceed with caution and make sure your agent/you know what you are doing.
    • Lack of transparency in fees. Complicated terms and conditions.
      I ABSOLUTELY agree with this.  Hopefully this will change, we live in the informational age and they should change.  Check out the following link: [MOD EDIT: Spam Link Removed.]
    • There are plenty of other options available
      Very true, it all depends on individual circumstance.  Do your research and get passed the sales pitch.
    [/list]
    « Last Edit: July 18, 2013, 02:38:30 PM by arebelspy »

    matchewed

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    Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    « Reply #13 on: June 28, 2013, 08:40:43 AM »
      So a week or two ago a life insurance salesman came onto the forums asking why mixing Life Insurance and Investing was bad.

      They go by a variety of names (e.g. an EIUL, Indexed Universal Life, Whole Life, etc. etc.) but the bottom line is you combine life insurance and investment into one vehicle.   Supposedly you get amazing returns, tax benefits, and it beats the stock market (according to the people selling it).

      This salesman seemed to genuinely be asking why it was a bad idea - he didn't get it.  So after we explained, and gave some decent reasons why it is almost always bad idea for the individual (but great for the life insurance company), he disappeared, along with the thread.  I think he got embarassed about how badly the idea got ripped apart, and deleted it.  It's a shame, because I'd have liked to use it as a reference for newbies asking about Whole/Universal Life.

      In any case, I ran across this article today and wanted to post it here so I didn't lose track of it.  It has some great arguments about why Whole Life is a terrible idea (and almost all, or all of, the same arguments apply to Universal Life as well).

      http://momanddadmoney.com/2013/06/why-whole-life-insurance-is-a-bad-investment.html

      In summary, the reasons given are:
      • Whole life insurance is undiversified
      • Whole life returns are not guaranteed
      • Positive returns take a long time to appear
      • Whole life insurance is illiquid
      • Less cash flow flexibility
      • The claim of “tax-free” withdrawals is misleading
      • Lack of transparency in fees. Complicated terms and conditions.
      • There are plenty of other options available

      Each reason is explained, of course.

      Enjoy!

      Thank you for sharing.  There are indeed some pros and cons to Whole Life and other permanent life insurance contracts.  The summary provided on the list above is not 100% accurate, albeit to be fair there is greater detail behind the summary list above on the blog post.
      Permanent Life Insurance is not meant for everyone...Financial products are great when used properly, but are terrible when abused by pushy salespeople. 
      It seems like a greater number of middle income consumers buy whole life or other permanent life insurance.  Which could be part of the problem.  If a middle income consumer lost their job they might not have enough cash flow, like a high net worth individual might to continue making premium payments.  This can be very costly.

      • Whole life insurance is undiversified
        There is NO market risk, the insurance carrier is assuming the market risk on behalf of the consumer.
      • Whole life returns are not guaranteed
        There generally is a guaranteed rate of return, like 4%.  While you delve a little further on the blog there is a guarantee.  Dividends or 'return of premiums' are not guaranteed.
      • Positive returns take a long time to appear
        It depends on the policy design, the investment performance of the insurance carrier, operational efficiency, etc.  Permanent Life Insurance is meant to be a long term 'hold' strategy, especially when you consider the name, "WHOLE LIFE"......It is meant to provide death benefit protection for your entire life, assuming premium payments are made.
      • Whole life insurance is illiquid
        It is not liquid like other financial products.  The cash value, while it can be borrowed via loans is not the consumers money.  It is the Life Insurance carriers reserves to pay future death benefit claims.
      • Less cash flow flexibility
        It depends on the consumer
      • The claim of “tax-free” withdrawals is misleading
        I tend to agree, proceed with caution and make sure your agent/you know what you are doing.
      • Lack of transparency in fees. Complicated terms and conditions.
        I ABSOLUTELY agree with this.  Hopefully this will change, we live in the informational age and they should change.  Check out the following link: http://www.breadwinnersinsurance.com/efforts-for-the-public/letters-to-naic/80-letters-to-insurers-and-regulators-imsa-president
      • There are plenty of other options available
        Very true, it all depends on individual circumstance.  Do your research and get passed the sales pitch.
      [/list]

      If the carrier assumes all the risk and goes belly up where do I get my money from?

      How are returns guaranteed? See my previous question and also what if the insurance company goes belly up, how do I get my money then?

      Put some numbers behind how they're structured. How does the design influence the rate at which returns appear?

      Honestly did you even read the link arebelspy provided? Try hitting those points. There is some good math behind them. How do you refute those? What assumptions are they wrong about and what assumptions should be used instead?


      brewer12345

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      Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
      « Reply #14 on: June 28, 2013, 09:37:50 AM »
        So a week or two ago a life insurance salesman came onto the forums asking why mixing Life Insurance and Investing was bad.

        They go by a variety of names (e.g. an EIUL, Indexed Universal Life, Whole Life, etc. etc.) but the bottom line is you combine life insurance and investment into one vehicle.   Supposedly you get amazing returns, tax benefits, and it beats the stock market (according to the people selling it).

        This salesman seemed to genuinely be asking why it was a bad idea - he didn't get it.  So after we explained, and gave some decent reasons why it is almost always bad idea for the individual (but great for the life insurance company), he disappeared, along with the thread.  I think he got embarassed about how badly the idea got ripped apart, and deleted it.  It's a shame, because I'd have liked to use it as a reference for newbies asking about Whole/Universal Life.

        In any case, I ran across this article today and wanted to post it here so I didn't lose track of it.  It has some great arguments about why Whole Life is a terrible idea (and almost all, or all of, the same arguments apply to Universal Life as well).

        http://momanddadmoney.com/2013/06/why-whole-life-insurance-is-a-bad-investment.html

        In summary, the reasons given are:
        • Whole life insurance is undiversified
        • Whole life returns are not guaranteed
        • Positive returns take a long time to appear
        • Whole life insurance is illiquid
        • Less cash flow flexibility
        • The claim of “tax-free” withdrawals is misleading
        • Lack of transparency in fees. Complicated terms and conditions.
        • There are plenty of other options available

        Each reason is explained, of course.

        Enjoy!

        Thank you for sharing.  There are indeed some pros and cons to Whole Life and other permanent life insurance contracts.  The summary provided on the list above is not 100% accurate, albeit to be fair there is greater detail behind the summary list above on the blog post.
        Permanent Life Insurance is not meant for everyone...Financial products are great when used properly, but are terrible when abused by pushy salespeople. 
        It seems like a greater number of middle income consumers buy whole life or other permanent life insurance.  Which could be part of the problem.  If a middle income consumer lost their job they might not have enough cash flow, like a high net worth individual might to continue making premium payments.  This can be very costly.

        • Whole life insurance is undiversified
          There is NO market risk, the insurance carrier is assuming the market risk on behalf of the consumer.
        • Whole life returns are not guaranteed
          There generally is a guaranteed rate of return, like 4%.  While you delve a little further on the blog there is a guarantee.  Dividends or 'return of premiums' are not guaranteed.
        • Positive returns take a long time to appear
          It depends on the policy design, the investment performance of the insurance carrier, operational efficiency, etc.  Permanent Life Insurance is meant to be a long term 'hold' strategy, especially when you consider the name, "WHOLE LIFE"......It is meant to provide death benefit protection for your entire life, assuming premium payments are made.
        • Whole life insurance is illiquid
          It is not liquid like other financial products.  The cash value, while it can be borrowed via loans is not the consumers money.  It is the Life Insurance carriers reserves to pay future death benefit claims.
        • Less cash flow flexibility
          It depends on the consumer
        • The claim of “tax-free” withdrawals is misleading
          I tend to agree, proceed with caution and make sure your agent/you know what you are doing.
        • Lack of transparency in fees. Complicated terms and conditions.
          I ABSOLUTELY agree with this.  Hopefully this will change, we live in the informational age and they should change.  Check out the following link: http://www.breadwinnersinsurance.com/efforts-for-the-public/letters-to-naic/80-letters-to-insurers-and-regulators-imsa-president
        • There are plenty of other options available
          Very true, it all depends on individual circumstance.  Do your research and get passed the sales pitch.
        [/list]

        If the carrier assumes all the risk and goes belly up where do I get my money from?

        How are returns guaranteed? See my previous question and also what if the insurance company goes belly up, how do I get my money then?

        Put some numbers behind how they're structured. How does the design influence the rate at which returns appear?

        Honestly did you even read the link arebelspy provided? Try hitting those points. There is some good math behind them. How do you refute those? What assumptions are they wrong about and what assumptions should be used instead?

        The carrier assumes the risk and is then subject to prudential supervision by state insurance regulators.  There is no FDIC for insurance companies, only a relatively weak guarantee association, so you always want to pay very close attention to a life insurer's creditworthiness.

        Return guarantees depend on the construction of the specific product.  The more complicated the product, the harder it is to really understand the underlying economics of what you are buying.  That is why I prefer relatively simple products like term life and SPIAs over variable annuities and whole/universal life.

        What momentum risk is hinting at around the return emergence thing is that different policies have different designs.  Some permanent life policies are structured to give positive returns relatively early in their life.  However, they are still complicated, expensive contracts and you are far better avoiding this stuff unless you really need life insurance in perpetuity (very, very few people do).

        Mr Mark

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        Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
        « Reply #15 on: June 30, 2013, 07:03:20 AM »
        Thanks for recreating the topic arebelspy.

        As one of the dissenters on that lost thread, I too regret the delete.

        All these products use a heap of hidden assumptions to create the illusion of forward returns. The real value in the equation - term life insurance - is used to offset the below market returns. The delta is taken by the company and agent. The fees -  which are considerable - can be forward sold, enabling a big upfront commission to the agent.

        The tax benefits are a red herring, applying only to multi-millionaires.

        These are truly tterrible investment products. Toxic. Run far, run fast.

        momentumrisk

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        Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
        « Reply #16 on: July 18, 2013, 02:30:16 PM »
        Quote
        If the carrier assumes all the risk and goes belly up where do I get my money from?

        How are returns guaranteed? See my previous question and also what if the insurance company goes belly up, how do I get my money then?

        Put some numbers behind how they're structured. How does the design influence the rate at which returns appear?

        Honestly did you even read the link arebelspy provided? Try hitting those points. There is some good math behind them. How do you refute those? What assumptions are they wrong about and what assumptions should be used instead?


        See brewer12345's response to the first question.  In some cases other insurance carriers will buy the block of business from the failing company; i.e. Prudential took over part of Hartford's life insurance business.
         
        Let me preface to say that ALL life insurance is comprised of TERM INSURANCE.  The older you are, the more expensive life insurance becomes.  30 year term is not always cost effective.  A properly designed permanent life insurance contract normally does not carry a high front end load.  See link below.

        Whole Life, Universal Life, Indexed Universal Life, Variable Universal Life contracts do offer tax deferred growth of cash value, but each policy design credits the cash value differently.

        Quote
        How does the design influence the rate at which returns appear?

        The contracts stipulate how each policy will be credited to cash value, which is comprised of investments returns from the insurer, and interest rates.

        Quote
        Honestly did you even read the link arebelspy provided? Try hitting those points. There is some good math behind them. How do you refute those? What assumptions are they wrong about and what assumptions should be used instead?

        Yes, I did read the post.  There were some interesting thoughts, however see: [MOD EDIT: Spam Link Removed.] for more information.

        [MOD EDIT: Quote tags fixed.]
        « Last Edit: July 18, 2013, 02:39:31 PM by arebelspy »

        arebelspy

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        Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
        « Reply #17 on: July 18, 2013, 02:41:30 PM »
        The contracts stipulate how each policy will be credited to cash value, which is comprised of investments returns from the insurer, and interest rates.

        And when the company changes the terms on you, as they often do?  The "guaranteed" rates often just get changed later in the contract.

        Quote
        Honestly did you even read the link arebelspy provided? Try hitting those points. There is some good math behind them. How do you refute those? What assumptions are they wrong about and what assumptions should be used instead?

        Yes, I did read the post.  There were some interesting thoughts, however see: [MOD EDIT: Spam Link Removed.] for more information.

        Those were some interesting thoughts, however see my random link?  Do you have any opinions on the article being discussed in this thread?
        We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
        If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
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        Nords

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        Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
        « Reply #18 on: July 20, 2013, 03:54:51 PM »
        In any case, I ran across this article today and wanted to post it here so I didn't lose track of it.  It has some great arguments about why Whole Life is a terrible idea (and almost all, or all of, the same arguments apply to Universal Life as well).
        Whole life returns are not guaranteed
        Positive returns take a long time to appear
        Whole life insurance is illiquid
        Lack of transparency in fees. Complicated terms and conditions.
        There are plenty of other options available.
        Let me chime in with a historical perspective, courtesy of my father.

        In the 1960s he started our family and began buying was sold four whole life policies that would pay total death benefit of $81K.  My mother died in 1987 and he retired shortly afterward.  Instead of cashing out the policies he switched the beneficiary from his spouse to us two sons.  (We sons didn't know this.)  In 2008 he began showing symptoms of Alzheimer's Disease.  In 2010 he responded to a "financial review" invitation from his local insurance broker.  The broker had been working with Dad for over a decade (vehicle & personal-property insurance) and had arranged Dad's Medicare supplemental insurance policy, so there was a degree of familiarity & trust between them.  For a $6700 fee, Dad arranged to exchange the four whole-life policies for a single-premium policy worth $92K.  He didn't discuss any of this with us sons, nor was there any expectation that he should.

        I took over Dad's finances in early 2011 and I've spent the last couple years going through his files.  He saved lots of papers over the years, and one of the thickest files was over four decades of correspondence with the whole-life company.  Starting in the late 1970s, barely a decade after some of the policies were issued, the investment returns weren't enough to pay the premiums.  Dad borrowed against the cash value of the policies to pay the premiums, and this continued until 1986 when the tax law change removed this deduction.  For another 20 years Dad was routinely dunned for additional payments to "catch up" the policy premiums. 

        I've known my Dad my entire life(!) and I used to be an accomplished expert at making him angry.  Yet I have never seen such anger as he displayed in his correspondence with the insurance companies.  Depending on who was running the company, their letters to him would be matter-of-fact or apologetic or blissfully optimistic.  They made a huge number of record-keeping and math mistakes, and they always seemed to be in their favor instead of Dad's.  (Or maybe Dad didn't feel it was necessary to correct their mistakes in his favor.)  Every year had at least one letter asking for more money or debating how much money he really needed to send them. 

        Note that over four decades the death benefit of the policies didn't change significantly, which effectively made them term insurance.  I can only imagine the results of a comparison of the premiums he paid over the years versus what he would have paid for term insurance.  If Dad had bought term insurance, he probably would have saved himself even more money by simply canceling the policies when he retired.  In 1987 my brother and I were well into our 20s and had no need to be beneficiaries of Dad's death.  However his personal "sunk costs fallacy" persuaded him to keep them in force far longer than necessary.

        When the agent contacted him in 2010, it was shortly after Dad had received the latest request for more premium payments.  I'm sure that by now he found the letters annoying at best and upsetting at worst.  Whether the agent was behaving as a fiduciary or merely following instructions is debatable.  In the agent's defense, Dad was an expert at social chitchat and could hide his symptoms for hours of coffeehouse conversation.  However the agency also filled out most of the application for him, so I suspect they knew that they were dealing with someone who was "easily confused".  I can't tell whether the agent suggested cashing out, and even if he'd suggested it then my father would probably have said "Ah, I don't need the money" and kept them in force.

        Dad "solved" the problem with the conversion to the single-premium policy, but it was a waste of time & money.  Neither of us sons need the money and neither of us wanted Dad to have to put up with so much crap from the insurance companies over the years.  While the whole-life policies may have provided peace of mind in the 1960s, by the late 1980s they were clearly unnecessary.  If I had received dunning letters in 2011 (after taking over Dad's finances) I would have simply cashed out the policies and added the money to his accounts to pay for his care.

        So when an insurance agent offers you "cheap whole life", try to imagine yourself having to deal with an insurance company for... your whole life.  Imagine having to track payments for decades, including filing the correspondence.  Imagine how you'll feel when this "asset" costs more than term insurance yet lags the performance of the stock/bond markets.  Imagine how long you're willing to throw money into them to "catch up" with declining returns from a low-interest-rate environment.  Even worse, imagine your kids having to take over the management task for you.

        Insurance should be used as a hedge against catastrophic expenses.  It should not be used as an investment.
        « Last Edit: July 20, 2013, 03:56:50 PM by Nords »

        brewer12345

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        Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
        « Reply #19 on: July 20, 2013, 06:09:21 PM »
        Nords, if you are willing to name names, which insurance company or companies were the ones your Dad used?

        Whole and universal life are massively oversold to the general public.  If you are one of the few people who actually needs one of these policies, your advisors will tell you.

        Nords

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        Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
        « Reply #20 on: July 20, 2013, 11:06:27 PM »
        Nords, if you are willing to name names, which insurance company or companies were the ones your Dad used?
        In the 1960s he bought the policies from "State Mutual Life Assurance Company of America", whose corporate address was 440 Lincoln Street, Worcester MA.  When I tracked down the status of the policies in 2012, the response came from "First Allmerica" in Topeka.  The fine print on their stationery says they're a Goldman Sachs company.  His 1035 exchange (in 2010) was issued by Bankers Life and Casualty Co, 660 West Chicago Ave in Chicago. 

        Bankers Life also handles his Medicare supplemental insurance policy.  I haven't added up how much he's paid in premiums since 1999, but I suspect that they've paid out far more to his doctors & hospitals over the last few years than he's paid in premiums over the last decade.  I hope Bankers Life has invested those premiums wisely, because the medical bills keep rollin' in.

        When Dad retired (shortly after Mom's death) in 1987, he earned a Westinghouse pension.  Of course he elected no survivor benefits.  Somewhere along the line W was bought by CBS/Viacom, and today his CBS pension includes another $43K of life insurance with us sons as beneficiaries.  I have no freakin' idea why a pension plan includes life insurance, but I wish Dad had spent a little more money on himself instead of "providing" for us kids. 

        His medication insurance also comes through his pension plan(!) via Medco.  He's on several medications (blood pressure, antidepressants, Alzheimer's, occasional Vicodin) and his co-payments alone are about $30/month.  I can only imagine what Medicare & CBS are paying.

        When he bought his long-term care insurance in 1992, I think the policy was issued from Fortis or Time.  When he made his claim in 2011 the policy was owned by John Hancock, and because of the 5% APY inflation rider they're paying out over $25 for every dollar he paid in premiums between 1992-2011.  I project that policy will hit its payout cap in late 2014. 

        When I took over his finances in 2011, he owned shares of Hanover Insurance Group.  I guess that meant he owned some sort of insurance through them (State Mutual?) before they went public, and he got shares from the IPO.  I sold those shares in 2011 and 2012 so that's no longer a concern. 

        I have no idea how stable or capable any of these companies may be, so let me know if any of them are considered marginal.  (I know John Hancock's claim/payment system is so bureaucratically dysfunctional that it's a mystery how they're making any money off the dropout rate.)  At this point I don't know whether I'd try to change any of his policies to a "better" insurance company.  (It's too late to cash out the life insurance policies, anyway.)  I have things running pretty well with the status quo, I don't want to upset the care facility or his current providers, and I'm reluctant to make long-term plans for a 79-year-old Alzheimer's patient in frail condition.

        Whole and universal life are massively oversold to the general public.  If you are one of the few people who actually needs one of these policies, your advisors will tell you.
        I think Dad was grossly overinsured from 1987 on.  The "good" news is that someday (hopefully years from now) his life insurance bequests will eventually fund my own long-term care insurance policy.  I suspect they'll also put my brother over the top for financial independence, so let me know if you're interested in buying a good dog-care business!

        My spouse and I don't carry life insurance because we each have our own military pensions.  (No Survivor Benefit Program, either, for the same reason.)  I'll probably buy my LTC policy from the Federal LTC Insurance Program within the next decade.  I sure hope Hancock isn't the only underwriter left in the sector by then...


        brewer12345

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        Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
        « Reply #21 on: July 21, 2013, 07:58:28 AM »
        To put it mildly, your Dad was less than selective on carriers when he bought his policies.  First Allmerica is what is left of a predecessor that blew up in the early 2000s and had the remains bought by Goldman.  Not a tower of financial strength.

        Banker's Life was part of Conseco, the ultimate parent of which went bankrupt in the early 2000s.  Some of their insurance operating companies have been in and out of receivership by the state regulators, although I have not followed the story in a while.

        The Fortis/Time policy was sold by a European bank-owned insurance group which was ultimately spun out of the bank (operates today as Assurant).  They sold the LTC business to Hancock at some point in their transformation.  Hancock is the number 2 insurer in the LTC market in terms of policies outstanding.

        Hannover was the parent of First Allmerica when it blew up.  'Nuff said.

        At this point, it is probably not worth trying to change any of the policies especially since he has no survivors depending upon the payouts.  But I think this is a good illustration for anyone who is considering buying a long tern insurance product.  Be very, very careful in choosing who you buy from.  Sometimes it is a lot smarter to pay a little more for a policy from a strong provider than to take the cheapest one from a marginal insurer.

        Nords

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        Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
        « Reply #22 on: July 21, 2013, 02:56:11 PM »
        Hannover was the parent of First Allmerica when it blew up.  'Nuff said.
        Thanks for the rundown.  I guess the good news was getting a few hundred shares of this company after all those years of squabbling over premiums.

        I wish I knew more about how he chose his policies, but it was never discussed in our family.  (I've learned all of this from his files, but he didn't keep any record of the 1035 exchange.  I had to query FirstAllmerica and Bankers Life with my conservator's court appointment to figure that out.)  I bet "cheap" was the primary criteria, along with an extra-friendly sales staff.  After Mom died I think he should have just cashed out his life insurance.

        I'm happy with Tricare (and eventually Tricare For Life) but if I didn't have those then we'd carry high-deductible policies.  I'd also probably skip the prescription medication insurance and hope to handle the expenses through lifestyle.

        My current feeling about long-term care insurance is "damned if you do, damned if you don't".  IIRC John Hancock has pulled out of the federal LTC program and now it's just MetLife.  Hancock's claims-paying paperwork is straight out of the 1980s.  It's probably nearly fraud-proof yet the cost of avoiding fraud is perhaps higher than the fraud itself.

        But Michael Kitces seems to be more optimistic:
        http://www.kitces.com/blog/archives/413-Is-The-Risk-Of-LTC-Insurance-Premium-Increases-Rising...-Or-Falling.html

        brewer12345

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        Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
        « Reply #23 on: July 21, 2013, 04:08:08 PM »
        The future of LTC premium increases probably depends almost entirely on what the long end of the interest rate curve does in the next several years.  I plan on sitting on the sidelines for the next decade, minimum.

        I'd guess all those insurers your Dad ended up with paid very generous commissions, so the salespeople were probably extremely friendly.

        Nords

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        Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
        « Reply #24 on: July 21, 2013, 06:18:42 PM »
        I think it's probably a good idea to purchase LTC insurance by age 60, before the annual premiums start ramping up, but I'd have to put a lot of different ages into a lot of different insurance-quote websites to verify that hypothesis.  We lose nothing by waiting and the worst may be behind us. 

        I'd guess all those insurers your Dad ended up with paid very generous commissions, so the salespeople were probably extremely friendly.
        $6700 for a 1035 exchange from whole life to a single-premium paid-up policy seems like a very generous fee to me too.  But the costs to litigate that discussion are far higher than any refunds.

        Dad's in a Denver care facility, however as his conservator I've changed most of his mailing addresses to here on Oahu.  Dad gets friendly letters from the Honolulu office of Bankers Life, whose staff has never met him but is eager to do so.  I think they're also keenly alert to the possibility that I might someday have insurance needs too...

        momentumrisk

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        Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
        « Reply #25 on: July 22, 2013, 12:27:26 PM »
        And when the company changes the terms on you, as they often do?  The "guaranteed" rates often just get changed later in the contract.

        For the purpose of Whole Life there is a Guaranteed Rate, which never changes over the duration of the contract!  Let's at least be clear and state the facts.  There are other permanent contracts available in today's insurance marketplace that start off with a set, or "guaranteed" rate for that given year, and will more than likely change in subsequent years, see Indexed Universal Life or Universal Life.

        Those were some interesting thoughts, however see my random link?  Do you have any opinions on the article being discussed in this thread?

        No random link or spam.  Just useful information about proper disclosures and illustrations that compare how permanent life insurance contracts are often sold, and a corresponding illustration with the same premium inputs where the cash value will be positive rather than zero at the end of the first year.  Term or cash value life insurance policies both have a place, and often times cash value policies are misunderstood or sold by agents looking for a handsome commission check.  A cash value policy can have no loads or lower loads if properly designed and policy information disclosed upfront. 

        The insurance industry has a bad rap because of misinformation that is constantly being spewed in the media.  If properly understood and informed consumers will be able to make the right choice for their individual circumstance.

        grandcanyon

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        Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
        « Reply #26 on: July 22, 2013, 05:14:42 PM »
        These products are a bad idea. I got sucked into UL and into a variable annuity a bit later before I wised up. Luckily, I was young and learned from my mistakes. These products are very confusing and if something goes wrong (tax, funding) you'll be on the hook. The reason I did the UL is because my dad gave me a WL policy and I went to the insurance company and they were more than happy to convert it into UL.

        The reason they have a surrender charge is since everyone gets paid upfront. True, the UL had a guaranteed premium but this was for two reasons. First of all, the COI was horribly expensive up front plus as the cash value increased the amount of coverage decreased. (100K policy with 10K cash value meant 90K in insurance coverage). If I over funded, it would turn into a Modified Endowment Contract (MEC) which I still to this day don't understand.

        I then had someone try to convert into a VUL but I had wised up by then. I couldn't believe the costs associated with a VUL. A 5% load right off the top and this was before they took out the premiums for the over priced insurance. I see why the insurance companies are on the top floor of the nicest building in the city.

        momentumrisk

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        Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
        « Reply #27 on: July 24, 2013, 12:16:24 PM »
        Sorry to hear about your bad experiences with Life Insurance and Annuities.  Sadly you are not the only one with these experiences and that is a problem.  There are financial reforms for the securities and investing businesses, yet no such reforms for the life insurance industry.  How that is possible is beyond me.  Plus, there is no such thing as 'fiduciary' in life insurance.  There are fee only insurance advisors, however they are not mainstream.

        MEC (Modified Endowment Contracts) - The limit is set by the IRS to avoid abusive behaviors on sheltering taxes.  If reached and exceeded all tax privileges from these contracts (life insurance) will be gone.  See section 7702 on the irs.gov site for thorough and detailed explanation.


        DaKini

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        Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
        « Reply #28 on: February 20, 2014, 06:18:21 AM »
        Hello there,
        how can i calculate the average return of such an insurance?
        We currently have 2 of those whole-life insurances, my one is noncontributory already.
        The one of my wife is an "old case" here with a guaranteed yield of 3,5% and also will be tax free in a few years.

        I dont know what to do with it because i cannot really calulate the options at hand (cash out, face the sunk costs and reinvest myself).
        The bigger problem is also, that my wife has a incapacity-to-work insurance coupled with her whole-life that will get lost if the whole life will be cancelled or converted to noncontributory.

        arebelspy

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        Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
        « Reply #29 on: February 20, 2014, 06:58:43 AM »
        Hello there,
        how can i calculate the average return of such an insurance?
        We currently have 2 of those whole-life insurances, my one is noncontributory already.
        The one of my wife is an "old case" here with a guaranteed yield of 3,5% and also will be tax free in a few years.

        I dont know what to do with it because i cannot really calulate the options at hand (cash out, face the sunk costs and reinvest myself).

        You will need to sit down with the paperwork and work out all the fees, the cost of the insurance itself, and then compare it to the alternatives.

        Additionally for a simple quick calculation do an IRR in Excel (probably XIRR) with your contribution amounts minus the cost of the insurance part, and then what the cash out value is today.

        The bigger problem is also, that my wife has a incapacity-to-work insurance coupled with her whole-life that will get lost if the whole life will be cancelled or converted to noncontributory.

        Your incapacity-to-work insurance (we call it disability insurance here in the States) is generally pretty cheap - look into it, but I wouldn't worry about how those are coupled together, as you should be able to easily pick up disability insurance standalone if you need it (many people may not).
        We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
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        Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
        « Reply #30 on: February 20, 2014, 08:17:55 AM »
        So I figure I'll add my (unique?) experience to the mix.  I have universal life policy.  My rationale behind it was that I wanted permanent life insurance.  My possibly irrational fear was still needing coverage after 20/30 years but being unable to get it or unable to get it at a reasonable price.  I was partly motivated by having a parent with a terminal disease at the time.

        Given those concerns I did some calculations of universal vs. term focusing on death benefit.  My universal life policy cost me 6.27 times as much as 30 year term.  Yearly it costs 0.888% of death benefit and term would have cost 0.142% of death benefit.  My universal life is only paid for 10 years with a guaranteed benefit until age 125 and the term was pay each year for 30 years standard.  I'm in my late 20s.

        So, I made a compounding interest chart for myself (I assumed 8% interest).  If I had saved my premium for the 10 years and it got 8% yearly it would equal my death benefit in 36 years (self insure, no short-term insurance).  If I had saved my universal premium minus term payment that money would equal the death benefit in 40 years.  That's assuming I could pay the same amount for insurance now and that I'd still need life insurance.  At 6% it's 50+ years.

        All in all I'm content with the decision not least because I knew the trade offs in and inflection points.  I definitely didn't do it for the cash value.  I also like the 10 years of payments.  I know it's stupid, but I don't like the idea of payments when I retire.  I should probably get over these things, though.

        pom

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        Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
        « Reply #31 on: February 20, 2014, 08:24:53 AM »
        Hi,

        In Europe, life insurance might not be such a bad idea. In France, for exemple, the money you have in a life insurance policy is not subject to the wealth tax so it is used a lot by rich people as a tax shelter.

        I dont know what to do with it because i cannot really calulate the options at hand (cash out, face the sunk costs and reinvest myself).

        As a rule of thumbs, if it is complicated and it is hard to calculate (approximately) the value of the options, this is a bad sign that the policy is full of hidden fees.

        Full disclosure: I currently work as an executive for a small French insurance company.

        anisotropy

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        Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
        « Reply #32 on: February 20, 2014, 10:31:59 AM »
        I actually have a different opinion regarding whole life insurance.

        I am currently enrolled in a "20 pay whole life insurance" with London Life that was started by my parents when I was 14 (1998/1999 ish?). The policy entails that we would have to pay roughly 100 a month or 1120 a year for 20 years. The payments go toward my insurance amount and this mysterious "cash value". Once I finish paying for the 20 years duration the policy becomes "self-sustaining", ie, the payout amounts and cash value goes up every year until I die and it's paid out to my parents.

        At the moment (16 years later) the cash value is just over 20k and the death benefit is slightly over 105k. Yes I am aware that the return has been less than the stock market returns but it is on par with GICs. I dont remember the exact numbers but it is projected that by the time I hit 65 the death benefit would be slightly over 300k and cash value just over 100k.

        To me, I see it as another portion of my asset allocation. Almost GIC returns and risks but less liquid. I dont think I will ever need to withdraw the money so the death benefits will prob act as part of inheritance for my families.

        foobar

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        Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
        « Reply #33 on: February 20, 2014, 11:18:10 AM »
        Have you run what 300k will be like in 35+ years after inflation? It might pay for your funeral:) Ok that is a bit of a stretch but whenever payouts are 30+ years in the future you have to remember those dollars have vastly different values. 

        Whole/Universal life insurance are good products. They are just something that 99% of us don't need.


        I actually have a different opinion regarding whole life insurance.

        I am currently enrolled in a "20 pay whole life insurance" with London Life that was started by my parents when I was 14 (1998/1999 ish?). The policy entails that we would have to pay roughly 100 a month or 1120 a year for 20 years. The payments go toward my insurance amount and this mysterious "cash value". Once I finish paying for the 20 years duration the policy becomes "self-sustaining", ie, the payout amounts and cash value goes up every year until I die and it's paid out to my parents.

        At the moment (16 years later) the cash value is just over 20k and the death benefit is slightly over 105k. Yes I am aware that the return has been less than the stock market returns but it is on par with GICs. I dont remember the exact numbers but it is projected that by the time I hit 65 the death benefit would be slightly over 300k and cash value just over 100k.

        To me, I see it as another portion of my asset allocation. Almost GIC returns and risks but less liquid. I dont think I will ever need to withdraw the money so the death benefits will prob act as part of inheritance for my families.

        arebelspy

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        Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
        « Reply #34 on: February 20, 2014, 11:38:38 AM »
        To me, I see it as another portion of my asset allocation. Almost GIC returns and risks but less liquid. I dont think I will ever need to withdraw the money so the death benefits will prob act as part of inheritance for my families.

        But it's not a different part of your allocation - it's purposefully choosing to offload part of your investments to another company so they can invest it for you with high fees. 

        Whole/Universal life insurance are good products. They are just something that 99% of us don't need.

        Disagree, and agree, in that order.
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        anisotropy

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        Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
        « Reply #35 on: February 20, 2014, 12:01:39 PM »
        Have you run what 300k will be like in 35+ years after inflation? It might pay for your funeral:) Ok that is a bit of a stretch but whenever payouts are 30+ years in the future you have to remember those dollars have vastly different values. 

        Whole/Universal life insurance are good products. They are just something that 99% of us don't need.



        I read somewhere that $ tends to be worth only 1/10 every 30 to 40 years, if that's the case I think we are all screwed.

        Basically I see this life insurance as a game: will I die before my premiums, if left alone, compound to be more than my death benefit by the time I die?

        Correct me if I am wrong, if we assume 4% annual interest (I think that's the avg for the last 16 years) and starts with $24000, it would take 65 years for it to be over 300k. Will I die before then? Prob.

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        Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
        « Reply #36 on: February 20, 2014, 12:03:55 PM »
        To me, I see it as another portion of my asset allocation. Almost GIC returns and risks but less liquid. I dont think I will ever need to withdraw the money so the death benefits will prob act as part of inheritance for my families.

        But it's not a different part of your allocation - it's purposefully choosing to offload part of your investments to another company so they can invest it for you with high fees. 

        Whole/Universal life insurance are good products. They are just something that 99% of us don't need.

        Disagree, and agree, in that order.

        Could not agree with arebelspy more. Life insurance companies take your money, assess the risk you are going to die in X years, charge you a premium, and invest the money in the mean time. Whole life insurance policies typically have very high premiums in comparison to term life insurance. Additionally, you are paying comparatively high fees to the insurance company.

        Keep your investments as investments and insurance as insurance. There are many legitimate reasons for life insurance (See term life insurance), but life insurance is not an investment. Insurance companies want you to think it is because that is how they make their money.

        Nords

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        Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
        « Reply #37 on: February 20, 2014, 10:08:04 PM »
        Thank you for this. I had to go over this with a coworker of mine a few months ago who is already 5 years into a whole life policy for himself but was looking into getting one for his infant son. Fortunately, I was able to talk him out of it and gave him some other, better options for college savings.
        And really, if your child dies, what good is life insurance going to do you?
        My father did this for me... about 50 years ago.  He bought a policy on himself when he started a family, and he declared us two sons his beneficiaries.

        I never knew about any of this until a few years ago.  Dad's in a care facility now with Alzheimer's, and I've been his conservator for the last three years.  I've gone through his files, including the four-inch-thick one containing nearly five decades of correspondence with the whole-life company.  I also had to do some forensic financial research to finish the puzzle that Dad left behind.

        The policy was doing great in the 1960s-1970s, which makes sense in retrospect considering how the bond markets were doing back then.  Around 1986, however, the tax laws changed so that borrowing against a whole-life policy (to pay the premiums, in this case) was no longer tax-deductible.  By then he'd been borrowing against the policy for about five years, but he decided to pay up & stay current.  Of course bond returns spent the next three decades going down, so the policy portfolios almost never earned enough to cover the premiums.

        Almost every year from the 1980s on the insurance company asked for more money.  Every year there were several volleys back & forth about how much was owed, where it was credited, and whether the math was correct.  I could tell from his tone in these letters how angry he was that the insurance company couldn't get it right.  (I recognized the warning signs!)  Yet he was deep into the sunk costs fallacy and he stayed current with the premiums. 

        By 2008 he'd begun slipping into Alzheimer's, yet he kept up the correspondence.  In 2010, it inevitably happened:  he answered the postcard of a local insurance salesman offering a "complimentary insurance review".  Dad was still living independently by then, but he could no longer handle a computer or e-mail and I'm pretty sure he wasn't competent to have an insurance discussion.  However no doubt that whole-life policy was still bugging the crap out of him, so the agent persuaded him (for a hefty premium) to exchange the whole-life policy for a single-premium policy.  (They courteously filled out all the paperwork for him.  I wonder whether he knew what he was signing-- but it made him happier.)  I'm sure the insurance agent knew he was dealing with someone who was less than competent, but it would take far more in legal bills to litigate it than the commission which Dad paid.

        Irony:  my brother and I didn't need those policies after we finished college in the early 1980s.  Dad should have canceled them at about the time he started having to pay more premiums. 

        More irony:  about six months after exchanging the whole-life policy for the single-premium policy, Dad nearly died.  His Alzheimer's was severe enough that he stopped eating healthy and forgot to take his blood-pressure meds.  Luckily the ER doctor figured it out and we sons got Dad into a full-care facility, where today he's much happier & healthier.  He no longer remembers the whole-life policy, so that doesn't bother him either.  If he had died before making it to the hospital, however, I doubt that the insurance company would have paid out for self-inflicted misconduct.

        So for those who are tempted by whole life insurance, consider whether you want to spend most of the rest of your life arguing about it with the insurance company.

        When I retired, my spouse and I had enough assets to live without life insurance.  Our daughter won't need anything from us.

        foobar

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        Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
        « Reply #38 on: February 21, 2014, 08:25:34 AM »
        Can you name a better product for transferring 20 million dollars out of your estate to your heirs? Obviously depending on your exact situation you can do various trust games but life insurance is also a very legit product for achieving that end. But at that point you are not really using it as either life insurance or an investment product. You are using as a tax dodge to avoid 40% tax rates at the federal level.  Again it is a useful product if you need it. The odds of you needing it are pretty low.



        Whole/Universal life insurance are good products. They are just something that 99% of us don't need.

        Disagree, and agree, in that order.

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        Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
        « Reply #39 on: February 21, 2014, 08:33:13 AM »
        I'm not sure how any of that, even to the extent that it's true, makes it a good or useful product.

        We'll have to agree to disagree, I suppose.
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        Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
        « Reply #40 on: February 21, 2014, 09:08:30 AM »
        Can you name a better product for transferring 20 million dollars out of your estate to your heirs? Obviously depending on your exact situation you can do various trust games but life insurance is also a very legit product for achieving that end. But at that point you are not really using it as either life insurance or an investment product. You are using as a tax dodge to avoid 40% tax rates at the federal level.  Again it is a useful product if you need it. The odds of you needing it are pretty low.

        I think those are separate issues, from the topic which was should you combine whole life/ universal life insurance policies and investing which I think the article shows is not a very good idea and I agree.

        The concept of the all in one solution is not very good, whole life is expensive and generally provides less bang for your buck then term life insurance strictly speaking as insurance policy it also generally provides excess coverage that is unneeded. The product is not stand alone which makes it more complicated, so it is not the ideal solution for insurance needs.

        As an investment product alone I think just about everyone in the MMM world will agree whole life is far less ideal then let’s say buying a Vanguard Index fund, or Betterment or ETF's or about 15 other ways to invest that will provide better returns then whole life policies, let’s face it no one has dedicated themselves to retiring early by buying whole life policies :p So if you are looking just to invest this wouldn’t even be a consideration, so why would you look at as part of some other product???

        Now to your point, what whole life policies are exceptional good at are shielding assets from estate taxes and preserving wealth for your heirs assuming you invested more wisely prior to buying the policy and have an estate upwards of $5 million single $10 million married on a federal level. If you have less than this the point is moot as there is no estate tax, yay for your heirs, of course different states have different estate taxes and some are harsher than others, I should know I live in NY and our estate tax kicks in at $1 million right now, but that looks like it is going to change as wealth leaves the state before it dies and pays the estate tax frequently.  Everyone knows the old NYers snowbird in Florida to get out of residency requirements to avoid the estate tax, and lots of younger NYers make their big NY money and live frugally then FIRE in lower COLA areas, these are not new strategies.

        To counter this NY is looking to change their estate tax laws to align them with the federal estate tax laws to prevent the exodus, if people remain in the state NY takes an immediate revenue hit, but long term they have a higher wealthy tax base, it makes good sense

        http://www.nytimes.com/2014/01/25/your-money/cold-facts-about-estate-taxes.html?_r=0

        So whole life is really only something to consider if you need to shelter your $11 millionth and die after 2019 in NY.... Otherwise buy term life if and when you need insurance and invest more traditionally.

        -Mister FancyPants
        « Last Edit: February 21, 2014, 09:34:27 AM by Mister Fancypants »

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        Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
        « Reply #41 on: February 21, 2014, 09:23:44 AM »
        Can you name a better product for transferring 20 million dollars out of your estate to your heirs? Obviously depending on your exact situation you can do various trust games but life insurance is also a very legit product for achieving that end. But at that point you are not really using it as either life insurance or an investment product. You are using as a tax dodge to avoid 40% tax rates at the federal level.  Again it is a useful product if you need it. The odds of you needing it are pretty low.



        Whole/Universal life insurance are good products. They are just something that 99% of us don't need.

        Disagree, and agree, in that order.

        This is SO TRUE ! +1

        stevesteve

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        Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
        « Reply #42 on: February 21, 2014, 11:02:21 AM »
        Can you name a better product for transferring 20 million dollars out of your estate to your heirs? Obviously depending on your exact situation you can do various trust games but life insurance is also a very legit product for achieving that end. But at that point you are not really using it as either life insurance or an investment product. You are using as a tax dodge to avoid 40% tax rates at the federal level.  Again it is a useful product if you need it. The odds of you needing it are pretty low.



        Whole/Universal life insurance are good products. They are just something that 99% of us don't need.

        Disagree, and agree, in that order.

        This is SO TRUE ! +1

        I think at the base level it's 'who cares about taxes if you're compounding at 8% and have more than double the value' as opposed to using life insurance.  If your assets are far higher even after taxes you will have more.

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        Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
        « Reply #43 on: February 21, 2014, 11:16:35 AM »
        I think at the base level it's 'who cares about taxes if you're compounding at 8% and have more than double the value' as opposed to using life insurance.  If your assets are far higher even after taxes you will have more.

        That's a good point.  The people using the strategy for insurance don't fund it over a long period of time, they jam a bunch of money in at once ("overfund" it).

        They definitely don't use it to build wealth, but shelter wealth they've built elsewhere.

        Even they know it's a bad deal, investment-wise.
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        Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
        « Reply #44 on: February 21, 2014, 11:59:16 AM »
        Do the math. You buy the insurance at 85 and die and 95 and you have a 20 million dollar estate.
        100k@4% for 10 years is 139k
        100k@8% for 10 years is 193k. Now you pay 40% tax is 115k.

        Which one would you rather have? Die sooner than 10 years and the gap grows. Die at 105 and investing might win out. You also have to figure out where to but it in your AA. If you replacing 4% bonds with 4% whole life, it is pretty break even without the tax advantage.

         Again this is not an really investment or life insurance. It is a way to pass assets to your heirs without paying taxes.  You have alternatives like the various type of trust but there is a class of cases where whole life makes sense.  When the exemptions were at 650k, this affect a lot more people. Now that they are at 5 million (per individual) not very many people have to deal with this.


        Can you name a better product for transferring 20 million dollars out of your estate to your heirs? Obviously depending on your exact situation you can do various trust games but life insurance is also a very legit product for achieving that end. But at that point you are not really using it as either life insurance or an investment product. You are using as a tax dodge to avoid 40% tax rates at the federal level.  Again it is a useful product if you need it. The odds of you needing it are pretty low.



        Whole/Universal life insurance are good products. They are just something that 99% of us don't need.

        Disagree, and agree, in that order.

        This is SO TRUE ! +1

        I think at the base level it's 'who cares about taxes if you're compounding at 8% and have more than double the value' as opposed to using life insurance.  If your assets are far higher even after taxes you will have more.

        arebelspy

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        Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
        « Reply #45 on: February 21, 2014, 12:46:26 PM »
        Do the math. You buy the insurance at 85 and die and 95 and you have a 20 million dollar estate.
        100k@4% for 10 years is 139k
        100k@8% for 10 years is 193k. Now you pay 40% tax is 115k.

        Which one would you rather have? Die sooner than 10 years and the gap grows. Die at 105 and investing might win out. You also have to figure out where to but it in your AA. If you replacing 4% bonds with 4% whole life, it is pretty break even without the tax advantage.

         Again this is not an really investment or life insurance. It is a way to pass assets to your heirs without paying taxes.  You have alternatives like the various type of trust but there is a class of cases where whole life makes sense.  When the exemptions were at 650k, this affect a lot more people. Now that they are at 5 million (per individual) not very many people have to deal with this.

        Your niche example is rare.

        Okay, it may make some sense for an 85 year old with 20MM.

        I would argue it basically never makes sense for someone 40 years old.  They should grow their money in a better vehicle, then purchase UL very late if they are interested in it as a wealth transfer vehicle.

        It's the young people that are scammed into getting it because they're told it's insurance and an investment.

        As you said:
        Quote
        Again this is not an really investment or life insurance.

        Yeah.

        So it's a bad idea.
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        Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
        « Reply #46 on: February 21, 2014, 01:31:00 PM »
        Do the math. You buy the insurance at 85 and die and 95 and you have a 20 million dollar estate.
        100k@4% for 10 years is 139k
        100k@8% for 10 years is 193k. Now you pay 40% tax is 115k.

        Which one would you rather have? Die sooner than 10 years and the gap grows. Die at 105 and investing might win out. You also have to figure out where to but it in your AA. If you replacing 4% bonds with 4% whole life, it is pretty break even without the tax advantage.


        I'm not trying to be a contrarian here ... but I don't see how the math works here.   I randomly went and got a quote for a $20M whole life policy for an 85 year old... and the premiums for those 10 years would have been $34M. 

        What am I missing?  ...because it looks to me like I'd be paying $14M extra in premiums to save a little more than $100k in tax.

        arebelspy

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        Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
        « Reply #47 on: February 21, 2014, 02:00:53 PM »
        Do the math. You buy the insurance at 85 and die and 95 and you have a 20 million dollar estate.
        100k@4% for 10 years is 139k
        100k@8% for 10 years is 193k. Now you pay 40% tax is 115k.

        Which one would you rather have? Die sooner than 10 years and the gap grows. Die at 105 and investing might win out. You also have to figure out where to but it in your AA. If you replacing 4% bonds with 4% whole life, it is pretty break even without the tax advantage.


        I'm not trying to be a contrarian here ... but I don't see how the math works here.   I randomly went and got a quote for a $20M whole life policy for an 85 year old... and the premiums for those 10 years would have been $34M. 

        What am I missing?  ...because it looks to me like I'd be paying $14M extra in premiums to save a little more than $100k in tax.

        It seemed like he was only buying a 100k policy, not a 20MM one.
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        Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
        « Reply #48 on: February 21, 2014, 02:04:45 PM »
        Do the math. You buy the insurance at 85 and die and 95 and you have a 20 million dollar estate.
        100k@4% for 10 years is 139k
        100k@8% for 10 years is 193k. Now you pay 40% tax is 115k.

        Which one would you rather have? Die sooner than 10 years and the gap grows. Die at 105 and investing might win out. You also have to figure out where to but it in your AA. If you replacing 4% bonds with 4% whole life, it is pretty break even without the tax advantage.


        I'm not trying to be a contrarian here ... but I don't see how the math works here.   I randomly went and got a quote for a $20M whole life policy for an 85 year old... and the premiums for those 10 years would have been $34M. 

        What am I missing?  ...because it looks to me like I'd be paying $14M extra in premiums to save a little more than $100k in tax.

        It seemed like he was only buying a 100k policy, not a 20MM one.

        Reedin compreehenshun:  I haz it.

        foobar

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        Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
        « Reply #49 on: February 21, 2014, 02:13:25 PM »
        Whole life is not term life. You would not pay the premiums for 10 years. At a certain point the account has enough value so that the account will pay the premiums and when the cash value exceeds the death benefit, you have to suck the money out (or raise the death benefit).  For example a simple example on  state farm, I can get 10 million dollars (for a 80 years old. They don't do 85 year old and 20 million online) policy for a one time payment of 8.95 million. 

        And really you shouldn't be comparing whole life insurance to stocks. The real comparison is do you buy tax free bonds or whole life.  Tax free bonds are yet another investment tool that only applies to a subset of the population.

        Again this is a product that 99% of the population doesn't need. It is very complex and a lot of the advantages only apply to certain people (you need asset protect, want to avoid estate taxes, ....). There is a reason why everyone knee jerk response is that it is a bad product.   For most people it is.

        Do the math. You buy the insurance at 85 and die and 95 and you have a 20 million dollar estate.
        100k@4% for 10 years is 139k
        100k@8% for 10 years is 193k. Now you pay 40% tax is 115k.

        Which one would you rather have? Die sooner than 10 years and the gap grows. Die at 105 and investing might win out. You also have to figure out where to but it in your AA. If you replacing 4% bonds with 4% whole life, it is pretty break even without the tax advantage.


        I'm not trying to be a contrarian here ... but I don't see how the math works here.   I randomly went and got a quote for a $20M whole life policy for an 85 year old... and the premiums for those 10 years would have been $34M. 

        What am I missing?  ...because it looks to me like I'd be paying $14M extra in premiums to save a little more than $100k in tax.