Author Topic: Why Whole Life / Universal Life Insurance Is A Bad Idea  (Read 51578 times)

Spork

  • Walrus Stache
  • *******
  • Posts: 5753
    • Spork In The Eye
Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #50 on: February 21, 2014, 02:26:47 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. 

It must vary by state.   I actually got my quote from state farm for 85 year old, $20M policy.  It came out to $ 286,826.35/mo or  $ 3,296,850.00 annually.   There is no mention that the account will pay the premiums... but I'll believe you if that's standard practice.

The only experience I have with Whole Life is one that was purchased for me (against my wishes) when I was a much younger lad.  I did manage to make it stop at some point and in my case it was a money hole that some one else shoveled money into.

foobar

  • Pencil Stache
  • ****
  • Posts: 731
Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #51 on: February 21, 2014, 03:18:47 PM »
I tried out FL and they are happy to give me 20 million for an 85 year old but they will not let me pay lump sum. The stopping of whole life is pretty standard once the cash value is putting out dividends large enough to pay the premiums.





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. 

It must vary by state.   I actually got my quote from state farm for 85 year old, $20M policy.  It came out to $ 286,826.35/mo or  $ 3,296,850.00 annually.   There is no mention that the account will pay the premiums... but I'll believe you if that's standard practice.

The only experience I have with Whole Life is one that was purchased for me (against my wishes) when I was a much younger lad.  I did manage to make it stop at some point and in my case it was a money hole that some one else shoveled money into.

Mr Mark

  • Handlebar Stache
  • *****
  • Posts: 1181
  • Location: Planet Earth
  • Achieved Financial Independence summer 2014. RE'18
Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #52 on: February 21, 2014, 08:21:47 PM »
For the average reader:

if you have significant liability and dependants that would suffer if you die, buy term life insurance for an amount sufficient to cover those liabilities.  It is easily and competitive ly available on the internet. Keep your savings and investment totally separate from insurance.

term live insurance is a very valuable financial product. Once you are FI you won't need it.

All the other shit like variable life, whole life, etc etc, - pushed by salesmen especially - is people trying to take your money as fees in exchange for an illusion. Ignore them.




meteor

  • Bristles
  • ***
  • Posts: 404
  • Location: Outer Space
Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #53 on: February 21, 2014, 10:34:25 PM »
Dave Ramsey is always ranting on how terrible UL is.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28008
  • Age: -999
  • Location: Seattle, WA
Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #54 on: February 22, 2014, 07:47:25 AM »
Dave Ramsey is always ranting on how terrible UL is.

One of the few things I agree with him on.  :)
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.

GlassStash

  • Stubble
  • **
  • Posts: 122
  • Location: The Arctic Midwest
Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #55 on: February 22, 2014, 10:29:24 AM »
For the average reader:

if you have significant liability and dependants that would suffer if you die, buy term life insurance for an amount sufficient to cover those liabilities.  It is easily and competitive ly available on the internet. Keep your savings and investment totally separate from insurance.

term live insurance is a very valuable financial product. Once you are FI you won't need it.

All the other shit like variable life, whole life, etc etc, - pushed by salesmen especially - is people trying to take your money as fees in exchange for an illusion. Ignore them.

+1 This the clearest and most concise advice on life insurance in this thread. I'm copying it down for the many (many) arguments I have with people about this topic.

TacosForever

  • 5 O'Clock Shadow
  • *
  • Posts: 53
Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #56 on: February 22, 2014, 10:38:29 AM »
It's unfortunate that the marketing for these types of policies is so poor and undifferentiated. Whole life insurance is a very specific product that makes sense for people in very specific estate planning/tax situations. I think the product itself gets a bad rap because it is marketed aggressively to people who don't need it, which is the fault of the insurance companies and salespeople.

Nords

  • Magnum Stache
  • ******
  • Posts: 3198
  • Age: 59
  • Location: Oahu
    • Military Retirement & Financial Independence blog
Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #57 on: February 22, 2014, 07:27:49 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.
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.
I suspect that your product is sold, not bought, and is more of a commission solution in search of a problem. 

For the people who find themselves suffering from this dire first-world problem, Buffett's solution will work just fine.  Unless, of course, Ajit Jain convinces him of a better idea.

Redfive20

  • 5 O'Clock Shadow
  • *
  • Posts: 21
Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #58 on: February 23, 2014, 10:08:53 AM »
Life Insurance companies are just one kind of financial companies. A lot of their products are complicated financial products.

For a pure death protection, it requires a policyholder to have good current heath without perceived elevated future mortality risks in order to get a decent rate on the death protection. Many people even they are currently healthy may not be able to pass Insurance companies' underwriting process. Therefore, life insurance is not for everyone even you want to buy it. For the people who are able to get a life policy, the mortality risk is pooled together based on gender, age and risk classes through one or multiple insurances. Policyholders who die relatively earlier since they get the policies would pay less than policyholders who end up with long lives. It is not uncommon to hear some large payouts in millions to some policyholders who just purchased for a year or so. Unexpected things did happen all the time. This is the main reason that we as consumers are looking for buy some types of insurances.

A Term policy is the cheapest type of products. One reason that it is cheap comparing with Whole Life/Universal Life is that it has limited years of protections. In general, the mortality risk goes up with age. Not only you would pay higher rate when you are older, but also you have more chance that you would not be able to buy one if you have to go through the underwriting process again. Some term products allow you to convert to a whole life/UL policy later. However, in order to get the good insurance rate, policyholders need to go through the underwriting process again. It is common that insurance companies are anti-selected at the end of term guaranteed periods when the product allows people to convert to a whole life/UL policy without going through underwriting again. The mortality rates for the policyholders who remained without going through underwriting again could be more than 10 times higher than the same age policyholders who went through underwriting again to get a better rate. Only very sick policyholders would remain to pay a very high level of premiums. Interestingly, insurance companies sometime underpriced these features of certain products. Policyholders think it is expensive to pay 3 times higher premium rate as the one within guarantee periods. However, insurance companies may still charge too little when the mortality rate shoots up 10 times higher than before. Agents are actually very good at play the anti-selection games with insurance companies. When pricing actuaries failed setting prices evenly by gender/age/risk class grid, agents would push tons of business only to certain grids which offer superior cheaper rates. This is the power of free market. Many pricing actuaries did buy Whole Life / Universal Life policies for themselves or their families when they perceived good prices.

When looking at investment features imbedded in the life insurance policies, it is more comparable if you try to rebuild investment components with multiple guarantees through synthesized options on the top of market performance. The reason that quite a few life insurance companies got into the trouble in 2008-2009 is that they significantly underpriced their products. I remembered to read an article from Wall Street in 2008. It said that there was no way that you could buy the annuity at the price commonly offered by insurance companies at that time if you buy the equivalent underling components directly from the market. In general, best talents in investments go to work in the Wall Street firms and the Wall Street firms normally make money from insurance companies. People often forget the cost of guarantees (removing certain risks). It could be very expensive, just looking at how fast the traditional pension plans go away among the private companies, how fast the mountain of deficits Federal and State level pension plans accumulate.

The Wall Street also offers many types of investment products. You would be a fool to trade options if you don't have enough knowledge on options. When you look at an insurance product, it often has complicated features and guarantees which means that you need to understand how the imbedded options work. It is very important for you to understand before you buy it. If it is too complicated for you to understand, it is better to just get a cheaper term policy to meet your protection need. The advantage of life insurance products on investment mainly is tax saving. If you look at the landscape of life insurance industries among different countries, it shows the material correlations between the size of life insurance industry and the tax benefits on these products in each country. US has a relative large size of life insurance industry. For high wealth clients and companies, life insurance industry provide valuable products for them. It could change if the Federal Government takes away some of these tax benefits in the future to resolve the deficit issue.

foobar

  • Pencil Stache
  • ****
  • Posts: 731
Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #59 on: February 23, 2014, 07:07:02 PM »
Give a better solution to the problem. Your solution is worse than paying 40% tax rate. You might believe the rich should pay more taxes than legally required. I am guessing few of them feel that way.



I suspect that your product is sold, not bought, and is more of a commission solution in search of a problem. 

For the people who find themselves suffering from this dire first-world problem, Buffett's solution will work just fine.  Unless, of course, Ajit Jain convinces him of a better idea.

Nords

  • Magnum Stache
  • ******
  • Posts: 3198
  • Age: 59
  • Location: Oahu
    • Military Retirement & Financial Independence blog
Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #60 on: February 23, 2014, 08:24:35 PM »
I suspect that your product is sold, not bought, and is more of a commission solution in search of a problem. 
For the people who find themselves suffering from this dire first-world problem, Buffett's solution will work just fine.  Unless, of course, Ajit Jain convinces him of a better idea.
Give a better solution to the problem. Your solution is worse than paying 40% tax rate. You might believe the rich should pay more taxes than legally required. I am guessing few of them feel that way.
I did offer a solution, although I didn't intend to be cryptic-- I'm referring to Buffett's plan to give away the vast majority of his wealth:  http://givingpledge.org/

I'm not sure what the tax rate will be, but I doubt that he'll pay a lot of taxes.

foobar

  • Pencil Stache
  • ****
  • Posts: 731
Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #61 on: February 24, 2014, 03:06:04 PM »
You think the problem is paying taxes.  It isn't. It is getting the most money to your heirs. Donating to charity is much less efficient than using whole life. You might feel better about giving some charity the money instead of the government but at the end of the day your heirs will have less money (back when their was 55% bracket this wasn't true) than if they just payed the tax.




I suspect that your product is sold, not bought, and is more of a commission solution in search of a problem. 
For the people who find themselves suffering from this dire first-world problem, Buffett's solution will work just fine.  Unless, of course, Ajit Jain convinces him of a better idea.
Give a better solution to the problem. Your solution is worse than paying 40% tax rate. You might believe the rich should pay more taxes than legally required. I am guessing few of them feel that way.
I did offer a solution, although I didn't intend to be cryptic-- I'm referring to Buffett's plan to give away the vast majority of his wealth:  http://givingpledge.org/

I'm not sure what the tax rate will be, but I doubt that he'll pay a lot of taxes.

grantmeaname

  • Magnum Stache
  • ******
  • Posts: 4811
  • Age: 27
  • Location: NYC
  • Cast me away from yesterday's things
Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #62 on: February 25, 2014, 07:34:38 PM »
That really depends on the size of the estate. If you're married the first $10M (plus $28,000 per recipient per year) is free even without obnoxious products. After that point, i)why do your heirs need to be even more than multimillionaires, and ii)why don't you just set up a trust?

Life as a plutocrat must be really tough.

Nords

  • Magnum Stache
  • ******
  • Posts: 3198
  • Age: 59
  • Location: Oahu
    • Military Retirement & Financial Independence blog
Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #63 on: February 25, 2014, 11:02:13 PM »
You think the problem is paying taxes.  It isn't. It is getting the most money to your heirs.
Giving my money to my heirs is neither a problem nor a concern.  If it's a problem or concern of yours then, yeah, you should probably consider buying some sort of insurance to help you achieve whatever your goal may be. 

I still think that the best way to avoid a huge steamin' pile of estate taxes is to give the money away before/when you die, and I think Buffett's giving pledge is a marvelously efficient way to do so.  Unfortunately it does not generate many commissions for insurance salespeople.

foobar

  • Pencil Stache
  • ****
  • Posts: 731
Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #64 on: February 26, 2014, 09:25:44 AM »
Maybe I have 20 heirs and each of them is only getting 500k so they are not close to multimillionaires.:) You know what one of the best ways to fund a trust? Whole life insurance:) Personally I have no desire to butt into other peoples private lives. If they want to give the money to heirs or charity makes no difference to me.

I wish I knew why people were so opposed to thinking. They read so where that whole life is bad and parrot that back rather than thinking about the cases where it makes sense and then deciding if they fall into one of those categories.

FWIW I never expect to buy whole life and don't sell insurance. If my net worth gets to 20 million (or the exemption is dropped to 650k), I will reconsider:)



That really depends on the size of the estate. If you're married the first $10M (plus $28,000 per recipient per year) is free even without obnoxious products. After that point, i)why do your heirs need to be even more than multimillionaires, and ii)why don't you just set up a trust?

Life as a plutocrat must be really tough.

GlassStash

  • Stubble
  • **
  • Posts: 122
  • Location: The Arctic Midwest
Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #65 on: February 26, 2014, 10:57:41 AM »
I wish I knew why people were so opposed to thinking. They read so where that whole life is bad and parrot that back rather than thinking about the cases where it makes sense and then deciding if they fall into one of those categories.

Quoting a rule of thumb is not being "opposed to thinking."

Rule of Thumb: Whole/Universal Life Insurance is inferior to term life insurance.

Exception: If you have an extremely large amount of assets that you need to transfer with minimal tax liability.

The exception you mention is a very small one that doesn't apply to 99% of the US population. Therefore, whole/universal life insurance doesn't make sense for that population. Why would any waste time giving advice about outlier situations (exceptions) that they knew weren't applicable? Giving such advice shows more of an opposition to thinking.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28008
  • Age: -999
  • Location: Seattle, WA
Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #66 on: February 26, 2014, 12:58:59 PM »
I wish I knew why people were so opposed to thinking. They read so where that whole life is bad and parrot that back rather than thinking about the cases where it makes sense and then deciding if they fall into one of those categories.

Quoting a rule of thumb is not being "opposed to thinking."

Rule of Thumb: Whole/Universal Life Insurance is inferior to term life insurance.

Exception: If you have an extremely large amount of assets that you need to transfer with minimal tax liability.

The exception you mention is a very small one that doesn't apply to 99% of the US population. Therefore, whole/universal life insurance doesn't make sense for that population. Why would any waste time giving advice about outlier situations (exceptions) that they knew weren't applicable? Giving such advice shows more of an opposition to thinking.

This. 

The problem with adding the ccaveat right from the get-go is people think it applies to them.

They hear "except in rare circumstances to save on taxes for inherited money" and think "well I'll be passing some money along to my heirs, I should do that," not realizing they won't have multiple millions, and when they buy whole life to save on taxes, they don't actually save any due to the already existing exemptions and they lose a lot in terms of the fees charged.

It's better to steer them away from it completely, because believe me, those that have 10MM++ will have plenty of people chasing after them to try and sell them things.

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.

foobar

  • Pencil Stache
  • ****
  • Posts: 731
Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #67 on: February 26, 2014, 01:24:51 PM »
And when  outlier exception is mention and you still quote the rule, it means your not thinking.  Once you understand what the product does you can figure it if it applies to you. I know for some relatives that live in NJ (675k exemption) who seem to think they are going to save paying 15% tax by using these products.  I have no clue if they are right or not  but I can at least say yeah that sort of makes sense instead of having the knee reaction "Whole life is a bad product".

I wish I knew why people were so opposed to thinking. They read so where that whole life is bad and parrot that back rather than thinking about the cases where it makes sense and then deciding if they fall into one of those categories.

Quoting a rule of thumb is not being "opposed to thinking."

Rule of Thumb: Whole/Universal Life Insurance is inferior to term life insurance.

Exception: If you have an extremely large amount of assets that you need to transfer with minimal tax liability.

The exception you mention is a very small one that doesn't apply to 99% of the US population. Therefore, whole/universal life insurance doesn't make sense for that population. Why would any waste time giving advice about outlier situations (exceptions) that they knew weren't applicable? Giving such advice shows more of an opposition to thinking.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28008
  • Age: -999
  • Location: Seattle, WA
Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #68 on: February 26, 2014, 04:57:18 PM »
Yeah, they probably got sold a bill of goods.

How old are they?
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.

foobar

  • Pencil Stache
  • ****
  • Posts: 731
Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #69 on: February 26, 2014, 07:59:37 PM »
Late 70s.  My math suggested they are getting like 2-3% and the tax avoidance. That isn't great but it also isn't a heck of a lot different than most tax deferred fixed income products these days. They mentioned it worked out cheaper than setting up a  trust but I have no clue if that was salesman speak or if they talked to some one.  Personally I would have moved out of NJ to solve the estate and inheritance tax issues:)

Yeah, they probably got sold a bill of goods.

How old are they?

Mr Mark

  • Handlebar Stache
  • *****
  • Posts: 1181
  • Location: Planet Earth
  • Achieved Financial Independence summer 2014. RE'18
Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #70 on: March 10, 2014, 03:06:17 PM »
For the average reader:

if you have significant liability and dependants that would suffer if you die, buy term life insurance for an amount sufficient to cover those liabilities.  It is easily and competitive ly available on the internet. Keep your savings and investment totally separate from insurance.

term live insurance is a very valuable financial product. Once you are FI you won't need it.

All the other shit like variable life, whole life, etc etc, - pushed by salesmen especially - is people trying to take your money as fees in exchange for an illusion. Ignore them.

+1 This the clearest and most concise advice on life insurance in this thread. I'm copying it down for the many (many) arguments I have with people about this topic.


always meant to says thanks. :-)

G. Thomas

  • 5 O'Clock Shadow
  • *
  • Posts: 60
  • Age: 32
  • Location: Colorado
Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #71 on: November 14, 2014, 11:33:39 AM »
I was sold a $120,000 policy in late 2013 as a 25 year old.  Up to this point I have put in ~$2,600.  I purchased the policy with Northwestern Mutual which has had a dividend payout of about 5.5% since taking out the policy. 

I'm pretty sure I cannot walk away with any value of this policy as it went to fees and covering the chance of my death. 

What route would you take?  If I stopped paying ~$1,700 a year I would be out the policy and the initial money paid but would clear up money to put towards more becoming FI sooner.

Thoughts?

hodedofome

  • Handlebar Stache
  • *****
  • Posts: 1211
  • Age: 39
  • Location: Texas
Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #72 on: November 15, 2014, 02:37:13 AM »
I always enjoy reading old books that tell of 'recent' stories which happened long ago. I'm currently reading Margin of Safety by Seth Klarman (it's only selling for thousands of dollars on Amazon...) and Seth talks about the guaranteed contracts sold by insurance companies in the 80s. They were easy to do when interest rates were 15%, they could sell a guaranteed contract for 10% and pocket the spread. Then interest rates fell and the insurance companies had to reach for yield - they turned to junk bonds. When these bonds defaulted more than expected, the insurance companies either went under or came close to insolvency.

But that couldn't possibly ever happen again could it? :)

Edit: and wouldn't you know it, I read this article just after posting this. David is a former insurance actuary and insurance industry analyst. Alephblog.com/2014/11/12/is-this-legit/

Key passage: Life insurance is a very expensive way to manage assets, between the agents and the operating costs of the company.  At present, insurance company assets yield more than market rates, which gives a subsidy to customers, but the day will come, like the late 70s — early 80s, where it was very much the reverse.

Aside from scamming the tax man, and providing protection to loved ones at your death, life insurance is a lousy vehicle for building wealth.  If you have built wealth already, it is an excellent way to preserve it for your heirs.  But it won’t make you rich, and all of those advertising such accounts and those like them, make huge commissions off of permanent life policies if they are the agent.  They make out far better than you will.

Are they safe?  Yes, life insurance is safe.  Are they worth it?  No.  Not that I am bullish on the stock market now, but under most conditions, the stock market outperforms the returns that insurance companies before expenses, much less after expenses.
« Last Edit: November 15, 2014, 03:05:24 AM by hodedofome »

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28008
  • Age: -999
  • Location: Seattle, WA
Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #73 on: November 15, 2014, 07:32:43 AM »
Key passage: Life insurance is a very expensive way to manage assets, between the agents and the operating costs of the company.  At present, insurance company assets yield more than market rates, which gives a subsidy to customers, but the day will come, like the late 70s — early 80s, where it was very much the reverse.

Well and here's the thing. If their spread is more, you're giving up yield that becomes their profit.

So either:
A) You let them invest your money and the market does better than they promised and they keep the extra (so you end up with way less and they make tons of profit off you, and you're better investing on your own), or
B) You let them invest your money and the market does worse (completely unsustainable for them) and they default and you're better off investing on your own.

Either way you shouldn't use insurance to invest. Use insurance to insure against particularly rare and negative outcomes. Use investment vehicles to invest.
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.

mbecker

  • 5 O'Clock Shadow
  • *
  • Posts: 6
  • Location: Boston
    • Mom and Dad Money
Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #74 on: November 17, 2014, 07:42:33 AM »
I was sold a $120,000 policy in late 2013 as a 25 year old.  Up to this point I have put in ~$2,600.  I purchased the policy with Northwestern Mutual which has had a dividend payout of about 5.5% since taking out the policy. 

I'm pretty sure I cannot walk away with any value of this policy as it went to fees and covering the chance of my death. 

What route would you take?  If I stopped paying ~$1,700 a year I would be out the policy and the initial money paid but would clear up money to put towards more becoming FI sooner.

Thoughts?

I can't give any specific advice for your situation, since I don't know anything about your situation other than what you've put here. But I will simply say that IF you decide to surrender the policy, setting up automatic contributions so that $1,700 goes into either a 401(k) or Roth IRA would likely be a good idea. Best of luck!

WillPen

  • 5 O'Clock Shadow
  • *
  • Posts: 57
Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #75 on: November 18, 2014, 07:34:00 AM »
I have largely been ignorant on how these policies work, and knew little more than to stay away from them. I just spent a few minutes doing some cursory research -- Goodness gracious what a bag of convoluted crap.

I know some folks my age (early 30's) that are waist deep in them. Ugh.

Mighty-Dollar

  • Bristles
  • ***
  • Posts: 377
Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #76 on: November 20, 2014, 02:07:12 AM »
Avoid anything "investing" that involves an insurance company. Insurance companies are NOT playing Santa Claus! They are selling these products to make a profit and they have done the math and studied the markets so they KNOW that there is a very very high likelihood that they will make money even after they pay Mr. Sales Agent and pay for all of their overhead!

The insurance industry is FAMOUS for confusing annual interest payment rate with return on investment (ROI). The one that matters is ROI because ROI is THE measure that is used to compare investments. The "return" that they advertise is NEVER anywhere close to what your ROI will be.

It doesn't surprise me that an insurance salesman is asking questions about the products that he sells. Usually these guys are skilled at SALES but not the products they sell. Even when they are knowledgeable about the products they sell, they only tell you the happy talk.

MoonShadow

  • Magnum Stache
  • ******
  • Posts: 2542
  • Location: Louisville, Ky.
Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #77 on: July 02, 2015, 10:45:38 PM »
I know this is an old thread, but I wanted to include a perspective that has not been represented here, as well as a modern alternative to that same perspective.

I inherited a genetic disorder from my father. He could never get life insurance, and when I was 20 and just married, my father tried to get me to buy whole life. I was young and stupid, so I had better things to do with the money. Notablely, that didn't include investing it.  Ten years and one kid later, I was diagnosed with the same condition, and am now permanently ineligible for life insurance. I now have 5 kids, but the last three are adopted, due in part from the risks of my inheritable disorder.  So now that I have a different perspective, I have been researching into buying a permanent life policy of some form for my two oldest children; for I don't intend to give them the option of screwing this up.

To be clear, this is not an investment vehicle, it's a permanent life policy. Specificly, the one that I'm looking at is a 10 paid-up whole life policy on each.  It's better than term for them, because it would cover them for their whole life (thus named) and the premiums are paid by myself over a ten year period, then garranteed by contract forever.  This exact policy comes with other advantages, such as the ability to "borrow" from the paid policy in the event of a monetary crisis; and that the owner (myself or my wife) and not the policyholder (my kids) have the final say on any such loans. So it makes a great emergency fund, for a real emergency. A red sports car is not an emergency.

That said, there is also an alternative to this plan, even for my children, once they have their first job.  A Roth IRA.  Any IRA has a 'death benefit' as a 'qualified' reason for withdrawal, but the Roth acts like a life insurance policy because 1) contributions (premiums) are after tax and 2) qualified withdrawals (benefit payouts) are not typically taxed.  Also, the after-tax contributions to a RothIRA can be withdrawn without taxes or penalties, but not the interest or gains.  So it can also function as an emergency fund up to the actual amount contributed.

Either path is complex, at least for my family, so I expect I will do a small whole life policy as well as contribute to their first RothIRA to accomplish my goals.

Interest Compound

  • Pencil Stache
  • ****
  • Posts: 658
Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #78 on: July 03, 2015, 02:51:46 PM »
I know this is an old thread, but I wanted to include a perspective that has not been represented here, as well as a modern alternative to that same perspective.

I inherited a genetic disorder from my father. He could never get life insurance, and when I was 20 and just married, my father tried to get me to buy whole life. I was young and stupid, so I had better things to do with the money. Notablely, that didn't include investing it.  Ten years and one kid later, I was diagnosed with the same condition, and am now permanently ineligible for life insurance. I now have 5 kids, but the last three are adopted, due in part from the risks of my inheritable disorder.  So now that I have a different perspective, I have been researching into buying a permanent life policy of some form for my two oldest children; for I don't intend to give them the option of screwing this up.

To be clear, this is not an investment vehicle, it's a permanent life policy. Specificly, the one that I'm looking at is a 10 paid-up whole life policy on each.  It's better than term for them, because it would cover them for their whole life (thus named) and the premiums are paid by myself over a ten year period, then garranteed by contract forever.  This exact policy comes with other advantages, such as the ability to "borrow" from the paid policy in the event of a monetary crisis; and that the owner (myself or my wife) and not the policyholder (my kids) have the final say on any such loans. So it makes a great emergency fund, for a real emergency. A red sports car is not an emergency.

That said, there is also an alternative to this plan, even for my children, once they have their first job.  A Roth IRA.  Any IRA has a 'death benefit' as a 'qualified' reason for withdrawal, but the Roth acts like a life insurance policy because 1) contributions (premiums) are after tax and 2) qualified withdrawals (benefit payouts) are not typically taxed.  Also, the after-tax contributions to a RothIRA can be withdrawn without taxes or penalties, but not the interest or gains.  So it can also function as an emergency fund up to the actual amount contributed.

Either path is complex, at least for my family, so I expect I will do a small whole life policy as well as contribute to their first RothIRA to accomplish my goals.

Take the money you'd be paying towards the Whole Life Insurance for your children, and invest it instead. Put it in a Vanguard Target Retirement fund. That's it. It's as simple as that.

Once they have their first job, contribute the max towards a Roth IRA as well. Again, in the same Vanguard Target Retirement Fund.

This is orders of magnitude simpler than any whole life insurance policy, and by the time they're thinking of having their own kids, they'll have so much money saved up that the idea of life insurance will be laughable to them.

MoonShadow

  • Magnum Stache
  • ******
  • Posts: 2542
  • Location: Louisville, Ky.
Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #79 on: July 06, 2015, 12:35:42 PM »
Well, Interest Compound, that is how I would use the Roth, but it's still not actually insurance. The point of insurance is to protect against risk. It's not an investment. My grandmother died at 36 due to the condition. I'm 40, and exactly zero members of my family with the condition have lived to age 60. I don't know if my two oldest kids have it or not, it's a numbers game, but if they do I want to know that my grandchildren are somewhat insulated against a catastrophic loss of parental income.  I have no intention of making my children-in-laws wealthy via insurance.

And that is another thing. If my (for example) eldest son were to die around 40 with a wife and two kids, the Roth IRA would, as a matter of law, go to his wife. She doesn't exist yet, so I don't know if that's a good idea. If I pay the premiums on a 10-year paid up whole life policy, myself (if I'm alive) or my wife decides what becomes of the money. It could still end up with my daugther-in-law, or my wife might put it into a trust, or might pay off their mortgage directly, or whatever.

Again, whole life isn't cheaper than term life, but I can't get term life and it would be next to pointless to get term life on a pair of unmarried teenagers.  Yes, for the vast majority of people, buy term and invest the rest is a perfectly valid plan. For myself it would not have worked, because the term would have ended after I was diagnosed & before I entered the risky phase of life. I wouldn't have been able to renew the term at any price, but even if I could have, it would have already been cheaper to simply invest it all and hope for the best.

Investing it all and hoping for the best is also a reasonable choice for my kids. It's just not likely what I'm going to do.

Bob W

  • Magnum Stache
  • ******
  • Posts: 2947
  • Age: 60
  • Location: Missouri
  • Live on minimum wage, earn on maximum
Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #80 on: July 06, 2015, 01:00:55 PM »
In general even term insurance is a bad idea.   There are a few reasons for that.

1. You only win the bet if you're dead (and believe me the house wins these bets)
2.  Social Security for the surviving spouse and children is actually very generous up to a point. 
3.  Must every spouse spends the entire insurance money proceeds regardless if it is 20K or 2 million within 2 years or less.
4.  It costs money --- even at $50 per month you're giving up something like 60K in investments over 20 years.
5.  Most people keep their policies less than 7 years.   (this is why they can sell them so cheap as the majority never keep them)

I'm not saying it is bad for everyone as there are rare exceptions.   

For those considering life insurance please make sure to spend some significant money up front to establish a trust fund with specified payouts and investment parameters and low annual fees.   Assign the death benefit to the trust.  Every MMM reader should have one of these anyhow so that their assets have somewhere to go when they pass on.  Also be sure that when you get divorced (as half of you will)  to either drop the policy or change the beneficiaries. 

klystomane

  • Stubble
  • **
  • Posts: 180
Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #81 on: July 06, 2015, 01:05:53 PM »
Good thread. It sounds like a lot of you are quite well versed with this life insurance thing. I would like to hear what you guys think of my policy. I sort of forgot about this policy all these years and recently called to see what would happen if I canceled it.

Canceling my policy will result in a refund of approx. $600.

My policy: I'm currently 32 and bought into a policy when I was 26. I pay $125 a month and will have to for 15 years, after which I am insured for life until the day I die. Payout is $200k.

I did the math, and calculated what my return would be if I invested the money instead. In this case, I would invest $125 per month ($1500 per year) for 15 years, and then stop.

Assuming an annual return of 7%, the investment will be worth $37,693 after 15 years.

If I then leave it, and never add to it again, it will reach $200k after about 25 years.

So, adding up the numbers: original age + length of policy + time to reach policy payout = 26 + 15 + 25 = 66.

Conclusion: The policy is good if I die before turning 66. If I live beyond 66, then it's a crap investment.

The question is then, assuming I live past 66, should I cash out for the current $600, having already invested 6 years into the policy? Obviously there are other factors that play into this decision (I'm the sole breadwinner in my family; if I invest for 10 more years beyond 66, it effectively doubles in value; calculations are based on a 7% return but it could be higher/lower, etc.).

Thoughts?

dandarc

  • Magnum Stache
  • ******
  • Posts: 3468
  • Age: 36
Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #82 on: July 06, 2015, 01:21:03 PM »
Conclusion: The policy is good if I die before turning 66. If I live beyond 66, then it's a crap investment.

Could disagree that this is the break-even point, however, as a presumably healthy 32 year old, you're expected to live to 77 (male) or 82 (female) years old. 

http://www.ssa.gov/oact/STATS/table4c6.html

The odds are heavily in favor of you landing on the "crap investment" side of things.

klystomane

  • Stubble
  • **
  • Posts: 180
Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #83 on: July 06, 2015, 01:25:13 PM »
Conclusion: The policy is good if I die before turning 66. If I live beyond 66, then it's a crap investment.

Could disagree that this is the break-even point, however, as a presumably healthy 32 year old, you're expected to live to 77 (male) or 82 (female) years old. 

http://www.ssa.gov/oact/STATS/table4c6.html

The odds are heavily in favor of you landing on the "crap investment" side of things.

Agreed. I based the calculations on a 7% return, which could be better.

If I live to 77 (I'm male), then the additional 11 years will yield $400k+.

I suppose the only real point I need to consider is whether my family will need this money in the event I really did crap out early on (i.e. accident, heart attack, etc.).


Interest Compound

  • Pencil Stache
  • ****
  • Posts: 658
Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #84 on: July 06, 2015, 07:18:22 PM »
Well, Interest Compound, that is how I would use the Roth, but it's still not actually insurance. The point of insurance is to protect against risk. It's not an investment.

...


And that is another thing. If my (for example) eldest son were to die around 40 with a wife and two kids, the Roth IRA would, as a matter of law, go to his wife. She doesn't exist yet, so I don't know if that's a good idea.


3.  Most every spouse spends the entire insurance money proceeds regardless if it is 20K or 2 million within 2 years or less.

Consider investing the money with the stipulation that upon your child's death (assuming they themselves have kids), the money will be used to purchase a Single Premium Immediate Annuity (SPIA), payable to their children, or the guardian of their children, until they graduate college or hit age 23. Once the annuity is purchased, the income stream will pretty much be guaranteed. The spouse won't be able to take it out and blow everything at the casino.

MoonShadow

  • Magnum Stache
  • ******
  • Posts: 2542
  • Location: Louisville, Ky.
Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #85 on: July 06, 2015, 07:59:15 PM »
Well, Interest Compound, that is how I would use the Roth, but it's still not actually insurance. The point of insurance is to protect against risk. It's not an investment.

...


And that is another thing. If my (for example) eldest son were to die around 40 with a wife and two kids, the Roth IRA would, as a matter of law, go to his wife. She doesn't exist yet, so I don't know if that's a good idea.


3.  Most every spouse spends the entire insurance money proceeds regardless if it is 20K or 2 million within 2 years or less.

Consider investing the money with the stipulation that upon your child's death (assuming they themselves have kids), the money will be used to purchase a Single Premium Immediate Annuity (SPIA), payable to their children, or the guardian of their children, until they graduate college or hit age 23. Once the annuity is purchased, the income stream will pretty much be guaranteed. The spouse won't be able to take it out and blow everything at the casino.

What you are describing is a trust, and is not a legal possibility with a custodial account of any kind, but particularly of an IRA or Roth.  In order to do that, I'd have to invest those funds into a taxable account and simply include the trust into the will.  While a whole life policy is a crappy way to invest, it does have the advantage that, similar to a Roth, any gains inside the financial product is not consider income, and therefore not taxable.  This is one reason that whole life was such a popular middle class investment vehicle prior to IRA's and the rise of mutual funds. (Which, BTW, are modeled after how *mutual* insurance companies still invest internally)  And why whole life is still a popular estate planning tool for the very rich, life insurance payouts are not included in either the estate tax nor (typically) probate court.

In short, if I establish a Roth IRA for my two teenagers as soon as they get jobs, I cannot control those funds after they turn 18, no matter how much I put into them personally nor what my will may say.  That is not true if I bought whole life policies on my teenagers, because the owner of the policy (myself and my wife) are not the same people as the covered individual (my teenagers) or the beneficiaries.  With an IRA, the owner is always the covered individual, and the beneficiaries always the spouse first and then the kids.

MoonShadow

  • Magnum Stache
  • ******
  • Posts: 2542
  • Location: Louisville, Ky.
Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #86 on: July 06, 2015, 08:03:25 PM »


Consider investing the money with the stipulation that upon your child's death (assuming they themselves have kids),

And if it wasn't obvious from the above post; I have, indeed, considered it.  Quite extensively, in fact.

Interest Compound

  • Pencil Stache
  • ****
  • Posts: 658
Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #87 on: July 07, 2015, 04:36:52 AM »
Well, Interest Compound, that is how I would use the Roth, but it's still not actually insurance. The point of insurance is to protect against risk. It's not an investment.

...


And that is another thing. If my (for example) eldest son were to die around 40 with a wife and two kids, the Roth IRA would, as a matter of law, go to his wife. She doesn't exist yet, so I don't know if that's a good idea.


3.  Most every spouse spends the entire insurance money proceeds regardless if it is 20K or 2 million within 2 years or less.

Consider investing the money with the stipulation that upon your child's death (assuming they themselves have kids), the money will be used to purchase a Single Premium Immediate Annuity (SPIA), payable to their children, or the guardian of their children, until they graduate college or hit age 23. Once the annuity is purchased, the income stream will pretty much be guaranteed. The spouse won't be able to take it out and blow everything at the casino.

What you are describing is a trust, and is not a legal possibility with a custodial account of any kind, but particularly of an IRA or Roth.  In order to do that, I'd have to invest those funds into a taxable account and simply include the trust into the will.  While a whole life policy is a crappy way to invest, it does have the advantage that, similar to a Roth, any gains inside the financial product is not consider income, and therefore not taxable.  This is one reason that whole life was such a popular middle class investment vehicle prior to IRA's and the rise of mutual funds. (Which, BTW, are modeled after how *mutual* insurance companies still invest internally)  And why whole life is still a popular estate planning tool for the very rich, life insurance payouts are not included in either the estate tax nor (typically) probate court.

In short, if I establish a Roth IRA for my two teenagers as soon as they get jobs, I cannot control those funds after they turn 18, no matter how much I put into them personally nor what my will may say.  That is not true if I bought whole life policies on my teenagers, because the owner of the policy (myself and my wife) are not the same people as the covered individual (my teenagers) or the beneficiaries.  With an IRA, the owner is always the covered individual, and the beneficiaries always the spouse first and then the kids.

Why not invest in taxable? The 30% one-time tax hit, along with the small amount of on-going taxes on dividends, would easily be usurped by the ridiculous yearly fees of a whole life policy. I think you're underestimating just how bad Whole Life policies are.

immocardo

  • 5 O'Clock Shadow
  • *
  • Posts: 54
Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #88 on: July 07, 2015, 08:52:03 AM »
I wasn't going to post since this thread was just an old post that was bumped, but I wanted to throw this in.

When universal life was first marketed, it could be used by extremely wealthy individuals to buy the absolute minimum insurance value and invest huge sums of money for the tax benefits.  This was also used by some for money laundering.  Now due to the hurdle rate there is a maximum ratio between life insurance benefit and amount invested which prevents this.

Interest Compound

  • Pencil Stache
  • ****
  • Posts: 658
Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #89 on: July 07, 2015, 01:43:03 PM »
Well, Interest Compound, that is how I would use the Roth, but it's still not actually insurance. The point of insurance is to protect against risk. It's not an investment.

...


And that is another thing. If my (for example) eldest son were to die around 40 with a wife and two kids, the Roth IRA would, as a matter of law, go to his wife. She doesn't exist yet, so I don't know if that's a good idea.


3.  Most every spouse spends the entire insurance money proceeds regardless if it is 20K or 2 million within 2 years or less.

Consider investing the money with the stipulation that upon your child's death (assuming they themselves have kids), the money will be used to purchase a Single Premium Immediate Annuity (SPIA), payable to their children, or the guardian of their children, until they graduate college or hit age 23. Once the annuity is purchased, the income stream will pretty much be guaranteed. The spouse won't be able to take it out and blow everything at the casino.

What you are describing is a trust, and is not a legal possibility with a custodial account of any kind, but particularly of an IRA or Roth.  In order to do that, I'd have to invest those funds into a taxable account and simply include the trust into the will.  While a whole life policy is a crappy way to invest, it does have the advantage that, similar to a Roth, any gains inside the financial product is not consider income, and therefore not taxable.  This is one reason that whole life was such a popular middle class investment vehicle prior to IRA's and the rise of mutual funds. (Which, BTW, are modeled after how *mutual* insurance companies still invest internally)  And why whole life is still a popular estate planning tool for the very rich, life insurance payouts are not included in either the estate tax nor (typically) probate court.

In short, if I establish a Roth IRA for my two teenagers as soon as they get jobs, I cannot control those funds after they turn 18, no matter how much I put into them personally nor what my will may say.  That is not true if I bought whole life policies on my teenagers, because the owner of the policy (myself and my wife) are not the same people as the covered individual (my teenagers) or the beneficiaries.  With an IRA, the owner is always the covered individual, and the beneficiaries always the spouse first and then the kids.

Why not invest in taxable? The 30% one-time tax hit, along with the small amount of on-going taxes on dividends, would easily be usurped by the ridiculous yearly fees of a whole life policy. I think you're underestimating just how bad Whole Life policies are.

FYI, I mean the ~30% tax hit inherent with paying with after-tax money. You incur this same inherent tax with the Whole Life policy, since it is also funded with after-tax money.

Note, if you have $500,000 invested in stocks upon death, your heirs won't pay any taxes on it, due to the stepped-up basis.

MoonShadow

  • Magnum Stache
  • ******
  • Posts: 2542
  • Location: Louisville, Ky.
Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #90 on: July 07, 2015, 03:00:47 PM »

Why not invest in taxable? The 30% one-time tax hit, along with the small amount of on-going taxes on dividends, would easily be usurped by the ridiculous yearly fees of a whole life policy. I think you're underestimating just how bad Whole Life policies are.

I think you are overestimating how bad whole life polices are.

MoonShadow

  • Magnum Stache
  • ******
  • Posts: 2542
  • Location: Louisville, Ky.
Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #91 on: July 07, 2015, 03:03:19 PM »

Note, if you have $500,000 invested in stocks upon death, your heirs won't pay any taxes on it, due to the stepped-up basis.

If you set it up correctly, then you are probably correct.  There are some notable exceptions, though.

MoonShadow

  • Magnum Stache
  • ******
  • Posts: 2542
  • Location: Louisville, Ky.
Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #92 on: July 07, 2015, 03:05:24 PM »

When universal life was first marketed, it could be used by extremely wealthy individuals to buy the absolute minimum insurance value and invest huge sums of money for the tax benefits.  This was also used by some for money laundering.  Now due to the hurdle rate there is a maximum ratio between life insurance benefit and amount invested which prevents this.

It was also commonly used by high income professionals, such as doctors & lawyers.  Now you have to spread the premiums out so that it's not 'paid up' faster than 7 years, or it loses the tax benefits.

Interest Compound

  • Pencil Stache
  • ****
  • Posts: 658
Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #93 on: July 07, 2015, 03:26:33 PM »

Why not invest in taxable? The 30% one-time tax hit, along with the small amount of on-going taxes on dividends, would easily be usurped by the ridiculous yearly fees of a whole life policy. I think you're underestimating just how bad Whole Life policies are.

I think you are overestimating how bad whole life polices are.

Nope. But don't take my word for it. Post the numbers, along with your calculations, and I'm sure someone will point out your mistake.

MoonShadow

  • Magnum Stache
  • ******
  • Posts: 2542
  • Location: Louisville, Ky.
Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #94 on: July 07, 2015, 05:07:19 PM »

Why not invest in taxable? The 30% one-time tax hit, along with the small amount of on-going taxes on dividends, would easily be usurped by the ridiculous yearly fees of a whole life policy. I think you're underestimating just how bad Whole Life policies are.

I think you are overestimating how bad whole life polices are.

Nope. But don't take my word for it. Post the numbers, along with your calculations, and I'm sure someone will point out your mistake.

I probably will, but I'm not exactly in a hurry to get this done, so it might be a while.

Shinplaster

  • Handlebar Stache
  • *****
  • Posts: 1389
  • Location: up in Canada complaining about the weather
Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #95 on: July 08, 2015, 06:11:18 PM »
Another perspective.  In general, I would agree that whole life policies are not a good use of funds.  However, we are now just at the point of collapsing our somewhat whole life policy, and taking out our substantial stash.   Why in the world did we have one?

Husband has medical issues.  For the early part of his career in particular, he had no disability insurance at work.  Even later, he sometimes had coverage, sometimes not, and we did not like the fact that there would be gaps where he would be vulnerable.  No Canadian insurance company would issue him just disability insurance, at any price - we tried them all.  But, London Life had their "Freedom 55" package going, and were willing to bundle disability coverage into their sort of whole life/sort of term life/totally complicated policies.   We didn't buy it as an investment, but rather mainly for the insurance value should he be disabled. The chance to get some of the money back at a future date made it a little less of a money pit, that's all.   At the time, we were given a chart of projected returns, which we never expected to actually realize - about 6% per year.   Low returns for the early 80's, but reasonable in today's climate.   Now, 35 years later, the actual and projected values are within a few hundred dollars of each other.  We are satisfied that for us, this was the right decision.   There were a lot of issues with this Freedom 55 package, which resulted in mandated top ups/free enhancements/wrist slapping over inflated promises.   (Don't ask me to explain - I'm not sure anyone except company execs and those negotiating the fixes know or understand the entirety of all the issues.  In the end, I believe we got several months worth of premiums added at no cost to us.)  Needless to say, no company here offers such products any longer. Our local agent calls us once a year, hoping we will agree to cancel the policy and get it off his books.  We will make his year this January when we finally say yes.

TomTX

  • Magnum Stache
  • ******
  • Posts: 3585
  • Location: Texas
Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #96 on: July 11, 2015, 08:48:12 AM »
I inherited a genetic disorder from my father. He could never get life insurance, and when I was 20 and just married, my father tried to get me to buy whole life. I was young and stupid, so I had better things to do with the money. Notablely, that didn't include investing it.  Ten years and one kid later, I was diagnosed with the same condition, and am now permanently ineligible for life insurance. I now have 5 kids, but the last three are adopted, due in part from the risks of my inheritable disorder.  So now that I have a different perspective, I have been researching into buying a permanent life policy of some form for my two oldest children; for I don't intend to give them the option of screwing this up.

You're not permanently ineligible for life insurance. There are group life insurance plans that have NO medical questions. For example, if you worked for the State of Texas, you could get term insurance for up to 2x your annual salary with no medical questions.  If you are a 40-44 year old male, it should be about $13/month. You can get up to 4x with medical questions.

I know that AAA has sent me advertisements for their no-medical-questions term life insurance. It cost more than the yes-medical-questions type, but it wasn't TOO bad.

For those comparing the return on whole life insurance "investment" versus investing yourself - you should NOT be using 7%. That's reasonable for an INFLATION ADJUSTED return, but your return is in nominal dollars, not inflation adjusted. You should be comparing against something like a 10% return.

hodedofome

  • Handlebar Stache
  • *****
  • Posts: 1211
  • Age: 39
  • Location: Texas
Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #97 on: July 13, 2015, 12:44:05 PM »
May not add anything to this thread, but this is a guy who knows the ins, the outs, and everything else about the insurance business. He knows everything there is to know about insurance :)

http://alephblog.com/2015/07/08/avoid-indexed-life-insurance-products/

Everyone reading should know that I am an actuary, as well as a quant and a financial analyst.  Math is my friend.

Math is not the friend of many of my readers, so I usually don’t bother them with the math.  Tonight’s post will be no different.  It stems from my time of creating investment strategies for what was at that time a leading indexed annuity seller.

What is the return that you get from an indexed annuity?  It is the return from index options, subject to a certain minimum return over a 7-15 year period. Now, on average, what is the return you get from buying any fairly priced option?  You get the return on T-bills plus zero to a slight negative percentage.  So, if the option premiums paid are cumulatively greater than the guaranteed minimum return, the product should return more than the minimum on average — but likely not much more on average.

Why is that?  Options are a zero sum game, and usually there is no inherent advantage to the buyer or seller.  There are some exceptions to this rule, but it favors at-the money option sellers, never buyers. Buying options is what happens with indexed annuity products.

Now, over any short amount of time, like 5-10 years, you can get very different results than the likely average.  That doesn’t affect my point.  With games of chance, some get get good outcomes, and other get bad outcomes.

Now, the indexed product sellers will tell potential buyers that they will never lose money if the market goes down.  True enough.   What they don’t tell you is that over the long haul, you will most likely earn more investing in one of Vanguard’s S&P 500 funds or even their Balanced Index Fund.  You may even earn more investing in their high yield fund, or even their bond market index fund.

In exchange for eliminating all negative volatility, you end up getting very modest interest credits, while still being exposed to the credit risk of the insurance company.  In an insolvency, your policy will be affected.  The state guaranty funds will likely protect you if your policy is underneath the coverage limits, but still it is a bother.

Add to that the illiquidity of the product.  Yes, you can cash it in at any time, do 1035 exchanges, etc., but before the end of the surrender charge period you will pay a fee that compensates the insurance company for the amortized value of the large commission that they paid the agent that sold you the policy.  For most people, the surrender charge psychologically locks them in.

Thus I say it is better to be disciplined, and buy and hold a volatile investment with low fees over time, rather than own an indexed annuity that will tend to lock you in, and deliver lower returns on average.  That’s all, aside from the postscript.

=–=-=-==–==-=-=-=-=-=-=-=–==-=-=–=-==-=-=-=-=–=-=-=-=

Postscript

How does an insurance company make a profit on an indexed annuity?  They take the proceeds of the sale, pay the agent, and use the rest to invest.  About 90% of the money will be invested in a bond that will cover the minimum guarantee.  The remainder will buy option premiums — the amount of money that gets applied to that is close to the credit spread on the bonds less the insurance company’s fees to pay the costs of the company and a charge for profit. Not a lot is typically left in a low yield environment like this.  The company tries to buy the most attractive options that they can on a limited budget.  Inexpensive options typically imply that most will finish out of the money, and/or when they do finish in-the-money, the rewards won’t be that large.


His other posts on insurance products are really good too.

http://alephblog.com/?s=life+insurance&submit=Search
« Last Edit: July 13, 2015, 12:46:31 PM by hodedofome »

MoonShadow

  • Magnum Stache
  • ******
  • Posts: 2542
  • Location: Louisville, Ky.
Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #98 on: July 13, 2015, 02:45:21 PM »
I inherited a genetic disorder from my father. He could never get life insurance, and when I was 20 and just married, my father tried to get me to buy whole life. I was young and stupid, so I had better things to do with the money. Notablely, that didn't include investing it.  Ten years and one kid later, I was diagnosed with the same condition, and am now permanently ineligible for life insurance. I now have 5 kids, but the last three are adopted, due in part from the risks of my inheritable disorder.  So now that I have a different perspective, I have been researching into buying a permanent life policy of some form for my two oldest children; for I don't intend to give them the option of screwing this up.

You're not permanently ineligible for life insurance. There are group life insurance plans that have NO medical questions. For example, if you worked for the State of Texas, you could get term insurance for up to 2x your annual salary with no medical questions.  If you are a 40-44 year old male, it should be about $13/month. You can get up to 4x with medical questions.

I have done this many times, and one of those questions is always something like, "have you ever been diagnosed with a chronic condition", and because of the laws, I have to answer yes, then specify.  I have *never* made it past the initial application.  I've never even been offered a too-high-to-accept rate.  The only kind of life insurance I can get are the kind that has to take you as-is, such a employer sponsored group plans, which I certainly do have.

Quote
I know that AAA has sent me advertisements for their no-medical-questions term life insurance. It cost more than the yes-medical-questions type, but it wasn't TOO bad.


Yeah, I've tried that too.  The root problem isn't that my average life is simply shorter, because they can figure that out.  The problem is that there is about a 3% chance I will drop dead randomly.  That is what happened to my grandmother at 36.  This is also one reason why getting my kids a form of permanent insurance is high on my list.  Although 3% is not a high risk, the result before my grandchildren are grown would be catastrophic.


the_fella

  • Stubble
  • **
  • Posts: 164
  • Location: United States
Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
« Reply #99 on: July 13, 2015, 04:02:08 PM »
I don't get why people advocate term life insurance. If you outlive your term, you may as well have gathered that money into a pile and set it on fire.