Whole life insurance as an investment vehicle

Question

From everything I have read I still cannot be convinced of Whole Life Insurance but it seems to be the first thing any financial advisor is trained to sell.

From what I read there are minimum guaranteed contractual rates at which the cash value of your account will grow at. If you were going with the mentality of buying term insurance and investing the rest what would be something you would invest in that could be "guaranteed" to perform at a rate equivalent to most whole life plans. Ideally higher would be better, but worst case what would be something that would be "guaranteed."

How are they guaranteeing anything? Where are they investing the money to be able to grow it consistently and without risk? Is it just due to other policy holders investing, they would still need to pay out the cash eventually plus larger payouts if someone were to die.

I'm looking for what most people recommend when giving the advice. "buy term and invest the rest."

Answer 1

From everything I have read I still cannot be convinced of Whole Life Insurance

Good! You have a brain!

but it seems to be the first thing any financial advisor is trained to sell.

The commissions on whole life are sick. The selling agent gets upward of 90% of your first year's premium. I imagine that the regional and district managers split the remaining 10%, but that is speculation. This is why there is typically a 15 year surrender charge on whole life. The LI company is not getting any of the money!

You may want to reevaluate any financial adviser that promotes whole life. If it was me, I would fire them the moment the words came out of their mouth.

Answer 2

It's a good question, but it turns into a general 'how to invest' question. You see, the cliche of "invest the difference" simply point to the ripoff the other two answers discuss. And it doesn't specify how to invest, only that this money should be put to work as long term investments.

The best answer is to find the asset allocation appropriate for your age and risk profile. It can be as simple as a low cost S&P ETF, or as complex at a dozen assets that include Stocks, both Domestic and Foreign, REITs, Commodities, etc. It's not as if the saved funds get segregated in a special account just for this purpose, although I suppose one can do this just as others have separate funds for retirement, emergency, vacation, college, etc.

Answer 3

As you haven't specified country, will try and answer more in general ...

Whole Life Insurance but it seems to be the first thing any financial adviser is trained to sell ...
The commission structure is such that it makes more attractive for a financial adviser to sell Whole Life. Plus for most buyers its easier to sell Whole Life compared to Term.

The way Guarantees are worded differ from Policy to Policy, most of them DO NOT give any Guarantee, its the Adviser misquoting. Where there is Guarantee, it would be similar to a Interest on Bank Deposit / Debt fund. Plus there are various terms used in the Policy, the Guarantee may not be on Sum Assured, but on the Policy Value that would be low.

In essence, you are right on investing the difference into any save instruments like Bank Deposits, Certain Debit Funds, Government Bonds, Retirement funds etc that would essentially give you more returns than whats promised in the Whole Life Policy.

Answer 4

Whole life policies have its own useful purpose, but it is never meant to be a vehicle that allows you to maximize cash value accumulation.

Yes, you can buy term and invest the difference. Assuming you set out to reduce your liabilities to zero/minimum when that term policy ends or you have no such desires to transfer your wealth to your next of kin income tax free.

Indexed universal life and variable universal life is much better suited for cash value accumulation when looking at life insurance products.

Answer 5

Often in life we have to choose the lesser of evils. Whole Life as an investment vs. Term Life and invest the difference is one of these times.

I assume the following statement is true. "The commissions on whole life are sick. The selling agent gets upward of 90% of your first year's premium."

But how does that compare to investing in mutual funds (as one alternative)?

Well according to Vanguard the average mutual fund keeps 60% of the total returns over the average investors lifetime. And of course income taxes (on withdrawal) consume another 30% (or more) of the dollars you withdraw (from a tax deferred retirement plan like a 401k.) http://www.fool.com/School/MutualFunds/Performance/Record.htm

So you have to pick your poison and make the choice that fits your view of the future.

Personally I don't believe my cost of living in retirement will be radically lower than my cost of living while working. Additionally I believe income tax rates will be higher in the future than the in the present and so deferring taxes (like a 401k) doesn't make sense to me. (In 1980 a 401k made sense when the average 401k participant was paying over 50% in federal income tax and also got a pension.)

So paying 90% of my first year's premium rather than 60% of my gains over my lifetime seems acceptable. And borrowing tax free against my life insurance once retired (with no intention of paying it back) will, I believe, provide greater income than a 401k could.