6

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."

11

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.

  • 3
    I would fire them the moment the words came out of their mouth. Came here to say the exact same thing. – Phil Sandler Feb 17 '14 at 22:56
3

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.

2

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.

0

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.

  • Indexed universal life and variable universal life is much better suited for cash value accumulation when looking at life insurance products. Can you explain why or provide a reference that backs up this claim? As it stands I can not follow why this would be true, or at least what it is you are actually saying. – Chad Jun 13 '14 at 21:26
  • Whole Life offers a fixed premium with a fixed interest rate crediting and non-guaranteed dividends. Universal Life offers a flexible premium (you can increase/decrease/temporary stop) and a fixed interest rate. Indexed Universal Life offers a flexible premium just like UL, but the interest crediting is based upon a market index or a set of market indices, that is credited between a Cap (a set maximum, typically around 10%-13%) an a Floor (typically between 0 and 1%). Today's fixed interest rate is pretty low due to the current economy and bond market. – Thevin S Aug 6 '14 at 17:46
  • Could you edit that into your answer please. I Think I would also expand on the tax benefits you allude to in your second paragraph. – Chad Aug 7 '14 at 11:48
-2

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.

  • 2
    So, I'd stay clear of those high cost funds, and stick with those costing .05%, a percent every 20 years. And I'd pay 15% cap gains in my non-retirement accounts, or 10-15% in retirement accounts upon withdrawal, on average. Last, are you suggesting that whole life has no cost at all after the first year? Sorry, are you an insurance salesman? – JTP - Apologise to Monica Nov 23 '14 at 23:39
  • 1
    Not to mention Roth IRA or Roth 401k – mhoran_psprep Nov 24 '14 at 0:47

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.