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Learning, Sharing, and Teaching => Investor Alley => Topic started by: arebelspy on June 24, 2013, 10:17:45 AM

Title: Why Whole Life / Universal Life Insurance Is A Bad Idea
Post by: arebelspy 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:

Each reason is explained, of course.

Enjoy!
Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
Post by: mbecker on June 24, 2013, 02:37:18 PM
Thanks for sharing the article! I'm glad you found it helpful.
Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
Post by: destron 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?
Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
Post by: arebelspy 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.
Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
Post by: Spork 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.
Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
Post by: Joet 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.
Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
Post by: pom 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.
Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
Post by: mbecker 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.
Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
Post by: pom 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 ;)
Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
Post by: workwheniwantto 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." 
Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
Post by: Spork 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.
Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
Post by: mbecker 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?
Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
Post by: momentumrisk 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.

  There is NO market risk, the insurance carrier is assuming the market risk on behalf of the consumer.
  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.
  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.
  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.
  It depends on the consumer
  I tend to agree, proceed with caution and make sure your agent/you know what you are doing.
  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.]
  Very true, it all depends on individual circumstance.  Do your research and get passed the sales pitch.
[/list]
Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
Post by: matchewed 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 (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?

Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
Post by: brewer12345 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 (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).
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: Mr Mark 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: momentumrisk 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.]
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: arebelspy 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?
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: Nords 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: brewer12345 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: Nords 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...

    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: brewer12345 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: Nords 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
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: brewer12345 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: Nords 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...
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: momentumrisk 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: grandcanyon 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: momentumrisk 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.

    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: DaKini 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: arebelspy 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).
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: stevesteve 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: pom 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: anisotropy 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: foobar 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: arebelspy 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: anisotropy 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: GlassStash 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: Nords 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: foobar 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: arebelspy 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: Mister Fancypants 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 (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
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: anisotropy 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
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: stevesteve 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: arebelspy 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: foobar 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: arebelspy 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: Spork 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: arebelspy 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: Spork 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: foobar 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: Spork 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: foobar 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: Mr Mark 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.



    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: meteor on February 21, 2014, 10:34:25 PM
    Dave Ramsey is always ranting on how terrible UL is.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: arebelspy 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.  :)
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: GlassStash 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: TacosForever 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: Nords 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: Redfive20 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: foobar 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: Nords 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: foobar 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: grantmeaname 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: Nords 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: foobar 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: GlassStash 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: arebelspy 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.

    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: foobar 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: arebelspy on February 26, 2014, 04:57:18 PM
    Yeah, they probably got sold a bill of goods.

    How old are they?
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: foobar 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?
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: Mr Mark 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. :-)
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: G. Thomas 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?
    Title: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: hodedofome 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: arebelspy 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: mbecker 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!
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: WillPen 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: Mighty-Dollar 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: MoonShadow 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: Interest Compound 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: MoonShadow 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: Bob W 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. 
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: klystomane 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?
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: dandarc 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 (http://www.ssa.gov/oact/STATS/table4c6.html)

    The odds are heavily in favor of you landing on the "crap investment" side of things.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: klystomane 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 (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.).

    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: Interest Compound 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: MoonShadow 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: MoonShadow 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: Interest Compound 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: immocardo 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: Interest Compound 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: MoonShadow 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: MoonShadow 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: MoonShadow 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: Interest Compound 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: MoonShadow 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: Shinplaster 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: TomTX 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: hodedofome 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
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: MoonShadow 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.

    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: the_fella 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.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: MoonShadow on July 13, 2015, 04:10:33 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.

    Well, they do it because all life insurance really is just term insurance, on the inside.  If I could get term that came with a contract that gave my kids an unrevokable right to renew at the original health/preference class, I'd do that.  But they call those contracts permanent insurance policies.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: Spork on July 13, 2015, 05:12:24 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.

    I believe it is because, in comparison to whole life, the pile of money you're setting on fire is smaller.

    You're covering a hole...  "If I die when I am young and my family is still building capital and my house isn't paid off... pay enough to cover."  The goal here really *IS* to outlive your term and lose the money. 
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: Cycling Stache on July 13, 2015, 05:24:04 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.

    You get term insurance in case someone depends on your income to pay debts, and then you get the amount they need to replace your income or at least get things under control.

    Term insurance is very cheap when you're young and most likely to have few assets accumulated, thus making insurance valuable if you have a spouse or kids, mortgage, etc.

    As you get older and grow assets, you should no longer need life insurance, because your assets are sufficient to cover your liabilities/take care of your dependents.  That works out great, because insurance gets more expensive as you get older.

    So get it early (and pay very little) if people are truly dependent on your income (i.e., it's not supposed to be a windfall to a relative).  Then plan on outliving it, and stop paying once you're in a good financial position.  And yes, you'd prefer to "throw away" the money rather than die early--hopefully!
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: dandarc on July 14, 2015, 07:52:28 AM
    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.

    Do you also say this about your auto and home-owner's or renters policies?  Under almost any insurance policy, the best case scenario is to not have any claims, and thus be paying the premium with nothing in return.

    Getting money back from your auto policy?  You were involved in some kind of car wreck.
    Home-owner's or renter's?  Something bad happened at the place you lived - fire, theft, collapse.
    Life?  The insured died.
    Disability?  You were injured to the point you can no longer do your job.
    Health?  Anything beyond the routine-care that is now required to be included is a pretty bad time.

    If I go my whole life without my auto policy paying a dime, I'll be thrilled.  Why is life insurance any different?  And the term life insurance, at least for me, is much cheaper than the auto insurance.
    Title: Re: Why Whole Life / Universal Life Insurance Is A Bad Idea
    Post by: Merrie on July 14, 2015, 11:18:58 AM
    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?

    Do you need life insurance in retirement? Bear in mind your spouse and/or kids would get your assets, and you wouldn't have an income from work that would need to be replaced. Most people don't need life insurance for their entire lives. Those who do are the exception rather than the rule. Are you in decent health or have you become uninsurable? If you are still insurable, you could and probably should ditch this policy, get a term policy for a fraction of what you pay now, and invest the rest of the money. Then you can cancel the term policy or let it run out once your assets have built up high enough to not need it any longer. The "I already spent X amount" is a sunk costs fallacy; don't let it fool you. And $200k isn't a lot either when you have kids who need to be raised and put through college.

    I am a 32 year old female in excellent health and pay $500 a *year* or so for $750k in term insurance. I am the high earner in my family so carry more of the insurance. My husband is 37 and in okay health aside from being overweight, and he pays around the same amount for $250k in term insurance. Just as a point of reference.