Term Life Insurance vs. Whole Life Insurance – In Plain English

by Neal Frankle, CFP ®

Term life insurance vs. whole life insurance. Which is a better choice for you? Term life insurance policies serve a purpose. So do whole life insurance policies.

The purpose of term life insurance is to protect your family for a specific time period. If you buy the right term life insurance, it does the job beautifully well.

On the other hand, whole life insurance has two purposes. The first is to protect your family. (And if you face estate taxes, whole life insurance does protect you against that problem while term life doesn’t.) The second purpose of whole life insurance is to make insurance companies and agents lots of money.

That’s why term life insurance is bought while whole life insurance is sold.

Let me explain.

When you buy insurance (whole or term), the insurance company knows what your odds are of surviving during the period of the insurance. For example, let’s assume you are in excellent health, you are 35 years old and you want $100,000 worth of insurance. The insurance company sells you (and 5,000 other 35-year-old people) $100,000 worth of coverage. Let’s assume the insurance company knows that out of 5,000 35-year-olds, 20 are going to die this year. That’s what actuaries figure out. That means that it’s probably going to cost the company $2,000,000 in clams this year. Make sense?

Now, if the company is going to pay out $2,000,000 this year, they have to collect at least that much in premiums. That means the company must collect $400 from each of the 5,000 people who buy insurance just to cover their costs. Now, this is called mortality cost, and those go up each year. Why? Because as you get older, your mortality risk increases (the chances of you dying go up.) So the mortality cost might be $400 this year, but since a 36-year-old has a slightly higher risk of dying than a 35-year-old, the insurance company is going to pay out more money for every 5,000 people they insure each subsequent year. If you are very advanced in age, the premiums get really expensive. That’s why some folks consider guaranteed issue life insurance, but term life insurance for older people is usually a better bet.) You can either buy annual term insurance and pay higher premiums every year or buy 10, 20 or 30-year term. When you buy term insurance for many years, you pay a higher premium the first year than you would if you bought annually renewable term, but the premium is level for the period. So if you buy 10-year term, the premium for the insurance is going to stay the same every year for 10 years.

That’s because the company figures out what their risks and costs are each year and simply averages the cost. When you buy term, you pay that $400 plus extra to cover sales commission, the other costs the company incurs and the profit the company wants to make. Let’s say the total premium for $100,000 is $800 a year. When you buy a whole life policy, the insurance company has the same exact mortality and administrative costs, so they charge you the same costs. But it doesn’t stop there. The insurance company actually needs to collect more. A lot more. Why? Because with whole life, the deal is, you not only pay the cost of insurance, you pay extra.

The insurance company takes that extra money and invests it. In theory, the earnings from those investments should earn enough to pay the premiums for you. So, in other words, after a certain number of years pass, the insurance is paying for itself. Isn’t that wonderful? The only problem is that the insurance companies charge very high commissions for the investment elements when you buy whole life insurance, and it rarely works as they project. They also charge very high expenses. The bottom line is, you could invest that extra money yourself and grow it much quicker than if you bought whole life and let the insurance company do it for you.

That’s why term life insurance is much cheaper than whole life.

So why would you buy whole life?

You wouldn’t unless you had no choice. If your family is at financial risk that goes beyond your life (meaning you face estate tax liabilities), you will need whole life insurance to transfer estate tax risk. That is the only reason to buy whole life (or universal life for that matter). Term doesn’t work to solve the estate tax problem because you might die after the term expires. Whole life insurance never expires, and you won’t have to make premium payments if the company is able to invest the money well.

So you should buy term life insurance if you are financially responsible for others for a specific period of time. If your family will need money to also pay for estate tax, you might buy whole life.

The bottom line is, whole life insurance is not an investment. The returns are terrible because the costs are very high.

photo by Tarotastic Flikr

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{ 156 comments… read them below or add one }

Felicia March 12, 2014 at 6:45 PM

I have a question. I am 42, recently divorced with no children. I have a 401K, a Roth IRA and some savings. I have basic life insurance and a group universal life policy through my employer. I am looking into purchasing additional insurance. I have been advised that I should cancel my GUL policy through my employer and instead purchased a $150,000 permanent life insurance plan, including waiver of premium and a $100,000 term life policy. I have found several articles on the web that lead me to believe that in my situation, a permanent whole life policy is not ideal for me. What do you think? Should I stick with GUL policy and purchase another term life policy or should I purchased the whole life policy?

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Neal Frankle, CFP ® March 20, 2014 at 12:07 AM

Felicia, I would need to know a lot more about your situation. But for now, why is the agent advising this? What is wrong with the current situation?

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Anthony Iuffredo March 20, 2014 at 5:43 AM

Just curious…anyone who has read this forum should know that the author, in every situation and circumstance opposes whole life insurance. And yet, people continue to visit this site and ask him for his opinion regarding whether or not they should consider whole life insurance. Thats a little suspect…are they even real people?

It should be crystal clear, Neal will ALWAYS in EVERY situation advise against whole life insurance AND advise to buy the cheapest term insurance AND invest the difference into mutual funds. AND brilliantly, when the term insurance disappears, HE or your financial advisor should have helped you accumulate enough wealth in your portfolio, that the insurance becomes unnecessary. As if you would cancel your homeowner’s policy when your house is paid off OR rip up your legal documents when your children are out of the house….

He will have you focus on the high compensation an agent receives on Whole life (that being the reason for the recommendation), the lack of transparency and the low ROR on Cash Value.He will also try to convince you that the guaranteed death benefit is meaningless.

Neal’s a CFP so he must be an “expert”…but doesn’t his conventional methodology prove that his approach hasn’t worked?Let’s look at the evidence…Baby boomers (More than half of which have less than $50k saved), who’s retirements have been highjacked, and are still just at the starting point of retirement. We can’t even really learn from their mistakes yet because they’re still at the infancy stage of no longer receiving a paycheck.

Might they have something different to report in 15 years when there still alive, trying desperately to live off fixed income and making even more compromises each year so they don’t run out of money. For most of them, early death is the best plan.

Look…It takes courage to challenge the status quo…be careful who you follow as the heard is being led straight to the slaughter house.

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ben March 12, 2014 at 12:59 PM

you are mistaken and have your facts wrong.

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Neal Frankle, CFP ® March 14, 2014 at 3:13 PM

Hmmm….Ben…thanks…but that’s pretty broad. Can you illuminate?

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charlotte a williams March 1, 2014 at 1:12 PM

50 y/o black female. I have a 401k but I only invest 3% in the plan. I want to invest in a ira roth or annualities term life insurance. my car dose not supply a retirement plane although I have been working for the company for 22 years. my children are grown and have their own lives. I wish to leave them something behind and not be a burden to them. I also want something to live on soon. I am in a chapter 13 at this time for 5 years, financially I am burdened but I wish to elevate asap. thanks.

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Neal Frankle, CFP ® March 3, 2014 at 12:34 AM

Charlotte, thanks for reaching out. I really respect what you are trying to do. My suggestion is to first get your financial situation more stable before tackling the other issues. Term insurance may not work in order to make sure you leave something for your children. But permanent insurance might be too expensive. Are you able to kick up your 401k contributions? You may want to re-arrange your spending to create a budget for that and some life insurance.

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Jackie January 23, 2014 at 6:22 PM

Why is our agent trying to convert our whole life policy that we’ve had for 35 years?

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Neal Frankle, CFP ® January 26, 2014 at 8:14 AM

This is an excellent question. It could be for very good reason. It could be that newer-better policies are available. What does the agent say? Tell me more please.

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Mario January 27, 2014 at 2:32 PM

Maybe he may want to convert the CV into some type of Indexed Annuity. More info would help.

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frank December 12, 2013 at 12:21 PM

I’m 35 and in good health. I need to purchase life insurance for my family and to offset taxes on my 401k in the future (30 years). Is it a good idea to pay 250 per month for a 500k whole life policy and couple it with 50 per month for a 500k term life policy for a total coverage of 1mil? I just need life insurance and a tax shelter. I have a few other growth investments as well.

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Neal Frankle, CFP ® December 14, 2013 at 1:47 PM

Why do you think you’ll pass away before you withdraw the money out of your 401k? Also, why not let your family take advantage of the inherited IRA or spousal IRA for your wife? That would take care of most of the income tax burden. If you want to discuss the viability of term, send me an email please. This is very individual. I would be happy to discuss. Thanks.

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Laura and Billy December 11, 2013 at 3:11 PM

I have a question. I am 41 years old and have 7 kids. Recently I found out that I had a cancer scare and was wondering what would be best for me. If something happened in 3 months or I live 15 more years what is my best investment and if something happened at 3 months would insurance help? Just worried about my family and appreciate any input. Thanks

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Neal Frankle, CFP ® December 12, 2013 at 6:44 AM

I hope this was only a scare and not a diagnosis. Do you currently have insurance? You might not need it if your assets are sufficiently large. Maybe you could email me and we discuss this. Neal DOT Pilgrim AT Gmail.com I wish you health and a long life! Neal

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Evan December 12, 2013 at 6:49 AM

@Neal,

What if it wasn’t just a scare? and it is a diagnosis…she is unisurable for YEARS to come. However, if she had purchase a whole life policy then it would continue vs a 20 year term bought at 25 ending in 4 years. We both live on the coasts Neal, are there ever enough assets with 7 surviving dependent children?

@Laura & Billy,
Like Neal I am hoping it is/was just a scare. If it was just a scare get underwritten YESTERDAY.

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Neal Frankle, CFP ® December 12, 2013 at 11:50 AM

AH……Evan – I think you have touched on a very important point. With 7 kids, money might be tight. If that is the case, and they need $2 million in coverage (a guess), do you really think they’ll be able to afford the coverage they need if they buy whole or universal? No. The agent will likely convince the person to buy the policy HE profits most from and that usually results in the family going without the real coverage they need. The whole life is often 7 to 10 times the premium that term costs.
Life is about tradeoffs. The most important thing this family needs to solve for is family protection. Whole life doesn’t do a good job in that department.

And of course, it would have been better had they applied for ANY coverage before the cancer scare. But that goes for a term or whole life. Agreed?

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Evan December 12, 2013 at 12:05 PM

I don’t think I am *that* guy who pushes whole life? Hell, while licensed I have never sold a policy (either type). I can safely and unequivocally agree the amount over coverage is step 1. Just b/c some people in business don’t understand that doesn’t mean whole life is terrible.

The point of my comment was simply to at least point out that even she had bought 20year term at 22, 24, 26 or 30 whenever her first child was born it would be running out soon and she would be uninsurable or prohibitively uninsurable.

Brett C October 20, 2013 at 12:52 AM

Neal,

I’m 27, I max my ROTH, I use a brokerage account for a little stock picking, and I contribute to my 401k only to the match. A friend in the business recommended a whole life policy for several hundred a month “to further diversify and to give me a plan B should the markets waiver when I retire.” Is this a good idea or should I just wait until I have kids to buy term?

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Neal Frankle October 20, 2013 at 9:54 PM

Brett. It sounds like you are a very savvy investor. Why not buy term and use your investment skills to grow the money? I am a huge fan of what you suggest. a. Buy insurance only when you need it (like when you plan to have kids is a good example) and b. buy term.

At 27, you will go thru many market cycles. I would focus on having a solid investment strategy for long-term growth and ditch the whole life idea myself.

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Brett C October 20, 2013 at 10:29 PM

Thanks Neal. I will probably hold off, but I guess my concern is looking at my father and his friends that had to delay retirement because of the recession… am I just better off having several years worth of cash/CD’s in retirement to ride out a cycle? I hate sitting on cash.

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Mario October 21, 2013 at 9:05 AM

Brett that business person gave you wonderful advice!!!! It is good to diversify and have a something guaranteed along with your investments. It doesn’t matter how many cycles the market goes through during your lifetime if the market crashes around retirement time you will be glad you bought that whole life policy. It isn’t a good idea, it is a great idea!!!!

Shame on you Neal. Being close-minded about a product could really hurt someone economically in the long run.

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Brett C October 24, 2013 at 1:51 PM

Based on what I’m reading, it does seem like people have made up their minds before even looking at these policies. Dave Ramsey has some good advice with several topics, but he does come off as an old fart that’s set in his ways. Its all about how profitable the insurance company will be over the next 40 years in terms of these projections.

I don’t want to commit to whole life now, but I will seriously consider it down the road once I’m married.

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Colin F October 27, 2013 at 7:08 AM

Sounds like the difference between term and invest or whole just depends on how much risk you’re willing to take. So far, my family has decided Term at $500K for my wife and I and Whole at $25K for for each child, which will mature when they are 25 years old (can be used to pay down college tuition perhaps?). So I guess our family is both? Why not benefit from both?

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Neal Frankle, CFP ® October 28, 2013 at 1:06 AM

Maybe it’s a good idea……but what is the rationale for the whole life? What is the benefit of this?

Neal Frankle, CFP ® November 2, 2013 at 9:55 PM

Thanks Brett. But what is your reasoning for this?

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Thomas Hulme October 18, 2013 at 8:14 AM

When you buy term insurance you are RENTING it. When you buy whole life it is yours to KEEP. I think the perfect time to by whole life is when you are young, why? Because it is so CHEAP. Lets say you are 25 and have perfect health. Your term insurance is probably going to be dirt cheap. What the insurance companies don’t tell you is that every five years your term insurance premiums go up. Now if you are older and living on a fixed income (like 90% of americans), than you can’t afford to be in your in your 60′s or 70′s and have your term insurance double in cost. This is the problem most people don’t see coming. Because EVERYONE thinks that they’re never going to get cancer or have any major health problems (heart attack, stroke, COPD, Diabetes), and when you do, guess what….you are in your 50′s and your term insurance gets more expinsive and cuts off at age 55, 60, or 65. So you basically be sitting on a chair throwing money out the window for 20 or 30 years. Because now your term is over and you need more insurance.
This is why I think it is important to get whole life when you are young.
If you are 25 and you get Whole life, your family and loved ones are set. Your insurance is yours for life. And its cheap because you didn’t wait till you were 50 (and had all kinds of health problems) to take care of your life insurance. You can always go back and raise your coverage, or get more insurance. But get whole life while you are YOUNG. You don’t need a huge amount, but you won’t regret it when your older and all your friends are complaining about how expinsive their insurance is.
The secret is to get a cheap $10,000 whole life policy and then add term because you have a morgage or a family. don’t waste all your money on term and then lose it. Because you will lose it and then you’ll be old with diabetes and have to pay more regardless of what type of insurance it is.
Get EDUCATED people. They don’t teach insurance in school.

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Neal Frankle October 19, 2013 at 7:17 PM

Thomas. Thanks. You do make some good points and I appreciate your passion. However:
a. Renting is sometimes far better than owning. This is a perfect example – life insurance.
b. Not everyone needs life insurance their entire lives.
c. Again, let’s consider alternatives and opportunity costs. Only 20% of the whole life policies pay a claim. Why? What happened to the 80%? Whole life doesn’t work for most people who buy it. http://theinsuranceproblog.com/whole-life-insurance-lapse-rates/

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Stephen October 21, 2013 at 2:07 PM

I would like to see a statistic from a reputable source…like LIMRA. I don’t trust a random article from a website that clearly supports Term only…

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Neal Frankle, CFP ® October 21, 2013 at 10:23 PM

Good point Stephen. A couple of questions.
a. what statistic would you like to see?
b. since I could support term or whole life, why do you think I support term?

Thanks for checking in.

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Stephen October 22, 2013 at 7:11 AM

I did some research on my own, but was having trouble locating specifics from a credible source. But I can guarantee that claims paid on only 15-20% of policies does not add up.

I have been an advisor for ~8 years and work with my father who has been in the business representing the same company for over 30 years.

To answer your question, I am not sure why you only support using term insurance. Specifically in my practice, I focus on reducing risk to the client. The “idea” of buy term and invest the difference is wonderful. However, they are simply too many uncertainties that could happen and derail that plan. Some people can and will get by with less or maybe no insurance in the future…but it all depends on what level of risk that client wants to take on.

The majority of clients we sell WL insurance to are age 50-65 who are still focusing on retirement but realize that because of uncontrollable variables: inflation, medical costs, market volatility, etc… they are not financially in the position they need to be in. If the husband has ~500k in retirement assets and another 250k term at the end of its term… do you think he can just afford to drop 1/3 of his estate?

If an advisor chooses to use a buy term only…for some situations depending on the client…that’s fine. But to say that it is the worst financial product out there…. you lose ALL credibility with me.

Mario October 22, 2013 at 8:28 AM

I can see you support term because you totally bypassed Brett’s concern in regards to what has happened to his father and his friends. I would be one of the 1st to say WL policies are not for most people and putting your money in some type of investment would be a great way to go but in Brett’s case he is an ideal candidate for a WL policy; unless you support term.

Neal Frankle, CFP ® December 9, 2013 at 2:11 AM

hmmmm.. Fascinating response. Why not respond to the logic of the post. Where is it off Stephen?

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brian walters October 18, 2013 at 6:32 AM

Neal.. I am 28 and my wife is 31. We were gonna do a whole life on our 10 month old son. It will cost us 150 a month for 20 years. Then it will be paid up. Is this a good idea for us. With new york life and he said we would get 4 to 5% interest on the money.

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Neal Frankle October 19, 2013 at 7:23 PM

Brian. Thanks for contacting me. And it’s great you are thinking ahead for your son. That’s just great. But read http://wealthpilgrim.com/life-insurance-for-children-never-buy-it-heres-why/ and http://wealthpilgrim.com/life-insurance-policy-with-cash-value/ I think these might help. Compare the cash value in 20 years to an alternative investment. Did the agent tell you what the guaranteed cash value would be. I would be really interested to hear.

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Mario October 20, 2013 at 10:51 AM

I think it is a great decision my friend. After those 20 years of making payments you should have all that you have put into the policy available in Cash Value. By the time you retire you should have about double the amount you have put into the policy guaranteed and possible more. By the way is the 4-5% guaranteed?

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Mario October 5, 2013 at 10:22 PM

Term or whole life… which is better? Although I will agree that Whole life is not for everyone to make it sound as something negative that is only good for estate planning leads me to believe that you do not recognize it for what it is. Are you aware that a policy that is paid up in 20 years will continue to generate guaranteed cash value that can double the amount of premium paid by retirement age. Don’t get me wrong… Investing is great. But having a proper whole life policy alongside of it works wonders. The hard part might be finding an life insurance agent that is more interested in structuring the policy for the clients benefit and not his commission.

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Neal Frankle October 6, 2013 at 1:33 PM

Mario, if you read thru this post and this post you will see that even though there are some benefits to whole life they pale in comparison to their drawbacks. And you have to compare this “paid up” benefit to the alternatives. If you do, I think you’ll agree that cash value insurance is typically not a good choice for most people. It may work for you – depending on your situation. That’s why I agree that you always need to talk with an objective third party.

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Anthony Iuffredo October 6, 2013 at 2:35 PM

I have yet to see an accurate comparison that allows the someone to see the REAL ROR on the alternatives of Whole Life Insurance. Whenever I see Buy Term & Invest the Difference, what’s NEVER revealed is the compounding cost of the term premiums, the compounded paid taxes on the investment account, the fees generated in the investment account AND the lost opportunity cost of the premiums, taxes, fees AND the loss of the death benefit in retirement.

Even low fee Vanguard mutual funds over time cost more than so called “expensive” whole life insurance. With Whole Life Insurance, as the cash value increases, the commissions have decreased….with mutual finds, as the account value increases, so do the fees. Show that over a 30 year period…not to mention, we haven’t even discussed the impact of market corrections and the sequence in which you may experience down years….the impact is devastating.

The real crime is the loss of the death benefit. Term insurance is important, but lets face it, its a cost with a 97% failure rate. (which is good because you’re still alive, but bad because you’ll be solely reliant on fixed income rates or risky investments to generate cash flow in retirement.

If CASH VALUE life insurance is such a bad investment, why do Fortune 500 corporations own so much of…why do the largest banks covet it as part of the Tier 1 Capital…look it up!

Neal is possible that you (And Suzy Orman and Dave Ramsey) could be wrong after all these years? While you’re doing more homework, why don’t you take a look at Suzy Orman’s bosses balance sheets…if they really valued Suzy’s advice as much as her ability to entertain, why would they own so much cash value life insurance?

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Sheri October 2, 2013 at 8:52 PM

I have both term and whole life. I am 41 and healthy and I have 2 children. Here is why I selected both:

- I selected term insurance because I wanted my kids to be protected if I died before they were out of college. That way, they would have enough money to be comfortable and get a college education. My term is only $19.99 a month and it lasts until I am 55 years old.

- I also have Whole Life. Everyone keeps saying it’s really expensive, but I didn’t think it was outrageous. It was $50 a month for $38,000 worth of insurance. Let’s say I live until I’m 85 years old. At $50 a month, I will have paid $26,400 into the policy, so I’m still making $10,000 + on the policy. This policy also guarantees a minimum of 4% per year interest, and builds cash value. When I’m 65, at minimum my cash value will be a little over $10,000. I can take that money out, have a lovely retirement vacation, and there will still be money left over for my funeral and related expenses when I pass. So, it works a little bit like a savings account that has a better interest rate than a normal savings account.

I took both of these now because I’m in good health. My father had term until he was 55 and planned to renew, but he developed diabetes and they would not let him renew. He isn’t eligible for any life insurance now. My husband, at the ripe old age of 39, had a heart attack this year. Thank goodness we put our term life policy into effect about a year before the heart attack, because now he isn’t insurable. I don’t want to be left in that position when my term policy expires.

With all of this said, I also have 401K accounts, IRAs, I have two different AD&D policies, and I have a very small amount of insurance on my kids to pay expenses if, God forbid, one of them dies prematurely. I certainly wouldn’t rely on Whole Life as a major investment option or something that is going to fund someone’s retirement, but I do think it can work just fine in a portfolio of various insurance and savings options.

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Joel September 21, 2013 at 5:09 PM

I’m 54 and can retire from LE position in one year. I can take a 100% pension or share my pension with my wife, but it will cost me about 10% a year of my pension to share. So if my pension is $40,000 a year, and I share it wife my wife (by share I mean that the pension continues until both of us dies) we get $36,000 a year until the last one dies. Some LE say they purchase life insurance instead of choosing the ‘share option’. I was thinking of just taking the share option since I can’t predict when I will die. Any thoughts?

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Neal Frankle September 22, 2013 at 6:21 PM

Life insurance might be helpful – or a complete waste. This is an important question and the answer depends on your entire financial picture. Do you have enough income? Would your wife have enough income without the pension? What are your ages? How healthy are each of you?

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Joel September 23, 2013 at 7:26 AM

The pension would be our income. She works part-time but no other income. She was a stay at home mom in the beginning. Without the pension, she would have no other income except the proceeds from a life insurance (if I got one). I am going to take a “gap year” (as the young people do sometimes before college) before starting my new career. Degree is in Agriculture so environmental opportunities might be an option. She is six years younger. I am leaning toward just putting both of us on the pension (we have been married 22 years and it is just as much hers as mine). If I die at 80 and she lives to 90, that’s 16 years of pension plus social security for her. No health issues. It is just confusing to me because almost all the other retirees don’t share the pension with their spouse (take 100%, not the 90%), but instead purchase life insurance. How can life insurance compete with a pension??

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Anthony Iuffredo September 23, 2013 at 9:24 AM

A true dilemma in retirement for people fortunate enough to get there with a pension….joint survivorship option OR to take a maximum distribution….

If I take the joint option AND I die after the first year, my spouse is assured lifetime income. The CONS, we are accepted a lower distribution AND if my spouse dies before me, I chose a lower income level.

Had a know…

If I do a maximum distribution option if will have enjoyed greater cash flow income for the entirety of my life…The CON is when I die which could be after the first year in retirement, my wife loses out on income for the remainder of her life.

A client can choose either option…but behaviorally most choose a joint survivorship option if there is not a guaranteed death benefit paid out.

If the client has a death benefit, that’s ABSOLUTELY guaranteed to be paid on your life, receiving a pension maximum distribution gives them the permission to enjoy greater lifetime cash flow and the pension replacement upon death.

Obviously, I would want to look at all the moving parts prior to making a recommendation… but strategically, a client can accept a pension max as an attractive option when they can secure a guaranteed contract to be paid upon their death.

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Joel September 23, 2013 at 7:28 PM

There are no moving parts. Just the pension right now. If I take the max payout, I have found no absolute life insurance that pays on my life should we both live a long time. If you know of one, please give example. Otherwise, you really haven’t told me anything I didn’t already know.

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Anthony Iuffredo September 24, 2013 at 4:35 AM

This is not a pitch for whole life insurance or for any particular carrier. That said, not all “permanent life insurance policies OR the guarantees from those carriers are created equal. For example, there are a lot of people over the years who have purchased what they believed were permanent life insurance policies, only to find out that they weren’t; i.e. – UL, SGUL, VUL, etc.) The strength of a guarantee is crucial when positioning whole life insurance to strategically allow you to spend down assets in retirement, annuitize, execute a reverse mortgage or choose a pension max.

What gives you the permission to make such decisions while you are alive is in the absolute knowing that a death benefit will be paid upon your death, whenever that may be. When you get to retirement you will have two primary concerns…the cash flow you and your spouse will have access to in order to preserve your dignity and independence AND your spouses ability to do the same when you die. Not knowing when the first or second will die and that the duration between may be vast, it typically causes us to be fearful of our decisions while we are alive…for the sake of running out of money or leaving a surviving spouse worse off.

The reason I asked about other moving parts was to see how the life insurance may be acquired. Other than qualifying for it with your health, they’re are premiums that have to be paid and maintained until the policy requirements are met. That will obviously require cash flow. You may use new cash flow to acquire the insurance, for example income you are earning today, or income/interest off assets (instead of reinvesting), or reallocating your savings inflows (provided you have ample liquidity), i.e. – 401k/IRAs/CDs/Money Markets, etc.

In any case, mutually owned carriers such as Guardian, MassMutual, NW Mutual and NYLife are the types of carriers you would want to consider as they are top tiered, highly capitalized to pay claims and have the longest history of paying top dividends back to their policyholders since they entered the marketplace. A carrier who has always paid competitive dividends may allow you to use in order to off-set the premiums sooner. Some people clip those dividends like coupons off bonds, to supplement their retirement income.

Big conversation…require lots of questions so that you’re comfortable with the concept. Details come later if you first understand conceptually the power in having a death benefit in retirement.

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Joel September 25, 2013 at 4:49 PM

Easy conversation: The ‘cash flow’ would be $4,000 or the difference between the max payout and the 90%.

Paul August 3, 2013 at 1:32 PM

Hi, your website has really helped. My situation is as follows. It is my wife, our 9 month old baby, and I. I’m a teacher making 46K/year. My wife does not work. My biggest worry is if I die within 18 years or so which is the time my baby will be in public school and hopefully entering college. Now, I heard of a life insurance plan that you can pay within that time frame and pays out X amount of dollars if you pass away. Now if you don’t pass away after the 18 years, X amount of dollars is given in return because you did not pass away. Is this kind of like whole life insurance or am I just confused? I’m thinking about using the return for her college expenses if I do not pass away.

Thanks

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Neal Frankle August 3, 2013 at 8:51 PM

You have to compare this “return of premium” insurance” vs just plain term. Have you looked into this? If you’d like assistance, let me know. Neal DOT pilgrim AT gmail DOT com

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Jenn July 29, 2013 at 9:18 AM

Hi Neal,
I have a sitatuoin that makes me a little unique based on the comments I am reading. I am 34 and in good health, I have two children (7 and 4) and we are trying for a third. My husband is 56 (in January he will be 57). I have a term policy on both of us through my employer ($250k for him and currently $401k – [it's based on 7x my pay]… it costs less than $100 a month for both). We currently rent, but plan to buy within two years. I don’t anticpate him working past 65, though he thinks he’ll go until at least 70. I have a very healthy 401(k) plan that I currently contribute 14% to (this is in addition to my matched 6%). Should I bother with additional insurance – and if I do…term or whole? My main concern is paying off or buying a house if something happens to one of us.
Thanks!
Jenn

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Neal Frankle July 30, 2013 at 11:09 AM

It is a good question but I need more info in order to give you a good answer Jenn. Please email me at neal DOT pilgrim AT gmail DOT com. Maybe I can provide more guidance.

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Gary July 19, 2013 at 10:55 AM

Hello Neal,

I just read your article on “Term Life Insurance vs. Whole Life Insurance – In Plain English”. I’m 36 years old, engaged, and no kids. I’m trying to figure out which type of life insurance to buy. I’ve been going back in forth about which term life insurance to buy. I have a thought. If I save 100.00 a month for a period of years(unspecified amount of years), can I use this money to be buried or cremated? I figure if I put away 5,000, this could be used to cremate me. I plan on paying off my house in 5 years, with no other debts.If I save this money separately, why do I need “Death Insurance”. I feel I can put the non-payments, and reinvest them in other ways. I have have enough money to cremate myself, debts are all paid, future wife is in the same situation; why take out a life insurance policy? I currently have a 80,000 term policy for 46.00 every quarter through the military. I feel that I’m trying to set myself up for the better, with no debts. What are your thoughts, I feel odd that none of my friends believe if you have a good savings, almost no debt soon, term policy; putting money aside for death cremation sound good to me. Thanks in advace,

Gary

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Neal Frankle July 19, 2013 at 12:58 PM

Gary. First, thanks for your service. We all appreciate it sir.

On to your question. Based on what you are telling me and if nothing changes, it’s a fine plan. The only thing is if you bride will depend on your financially and/or you have children down the line. IN that case, you might need more coverage. But assuming your wife would be able to support herself and children if and when they come along, I see no problem with your plan.

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Carrie July 17, 2013 at 7:03 PM

Hello!
I’m a 19 year old college student and my dad is pushing me to purchase life insurance and put both of my little brothers as the beneficiaries. My father has his own policy with my mom and sister as the beneficiaries. He believes if i purchase the life insurance, our whole family will be covered. Should I wait until I’m older to purchase it?

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Neal Frankle July 18, 2013 at 3:49 PM

Carrie,

a. what kind of life insurance does your father want you to buy?
b. who will be the beneficiary?
c. are you in good health….does your family have a good or poor health history?
d. does your family rely on you for income?

Thanks,
Neal

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Carrie July 20, 2013 at 11:43 AM

a. whole life insurance
b. my younger brother, but I was told I can change it to my children/ husband when I get married.
c. yes I’m in good health. My parents have high blood pressure but I believe that due to a poor diet.
d. nope.

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Rourke GT July 27, 2013 at 8:24 PM

Carrie, you are awfully young to think about life insurance, but it is always wise to be insured than not at all. Your father does have a point in keeping each of his children safe, but the question is; Can you afford the monthly premium for the rest of your life? Although many agents (mutual life insurance representatives) will or might tell you that years into the policy you may not have to make anymore payments because the dividends will help you pay into the policy and you are cover for life. Again, dividends are not guaranteed by any life insurance company.

This is my suggestion, and it’s up to you. You are the only person to make this decision and not me or anyone, especially your agent. Many agents will or might not agree with what I have to say, but here it goes. You do have a couple of choices by the way.

1. If you can afford the whole life premium, and do want life time protection and same guaranteed premium and death benefit to go through your marriage and senior years then the whole life policy might be a wise idea. Otherwise,
2. If you just want protection because your father is telling you to do so and the monthly premiums might put a dent on your bank account while going through college, buy a term life insurance policy from a reputable life insurance company that will give you the opportunity to convert your term life insurance to a guaranteed universal or whole life, should you change your mind about keeping your term life insurance.

But again, do yourself a favor and continue doing what you are doing now. Keep asking questions, sooner or later, you’ll come to a conclusion that will be in your favor.

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Carrie July 20, 2013 at 11:44 AM

Thank you!

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Doug K July 2, 2013 at 2:32 PM

This is a breakdown and discussion of the issues involved. I think that the primary issue here is that for a lot of people just having any coverage would be a big improvement, although I understand the point you are making about whole life not being a good investment. Like you, I believe that the value most people would get from a term life policy would be very beneficial to them.

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Nicole July 1, 2013 at 6:19 PM

I’m a 30 year old women, married, with three children in the home that we are primary responsible for, and two that live as where. My husband and I are trying to see which is better for us, whole or term life insurance? If anything shall happen to either of us we want the survivor and the children to be taken care of. I have been told that term is better for us but I don’t know if they was trying to make a sell or really looking out for our best interest. Please help me with your opinion, thanks!

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Neal Frankle July 1, 2013 at 9:52 PM

Can you email me please?

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jen June 25, 2013 at 5:18 PM

please forgive my ignorance as you all seem to be educated on the topic and full of opinions….I have read several times that whole life allows for monies to be passed down. If ,myou have 500,000 in term and you die, doesn’t that money get passed to the beneficiary? or am I missing something?
thanks

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Neal Frankle June 28, 2013 at 6:55 PM

No worries Jen. Yes, insurance goes to the stated beneficiary

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Amelia April 13, 2013 at 9:46 PM

This agent is offering a return of 1 million in 20 years but I have to pay $500 monthly for my life insurance. Could this be possible? sounds better than investing in my 401K

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Neal Frankle April 14, 2013 at 9:32 AM

This sounds out of the ball park to me. Check the guaranteed values. Is this variable life or whole life?

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Allison April 3, 2013 at 3:04 PM

My mom is going to be 81 years old on April 21st. She has a decent amount of stocks and investments, but has been seeing these ads on t.v about getting life insurance, so it will pay for her funeral expenses, etc. Is this something we should look into? I know a lot of insurances do not even cover her age, but Colonial Pen is the one that she has seen and they say they will give insurance up to 85, without a medical exam. I believe that it is whole life, but it seems very costly for the small amount she would get and if I read it right, she would have to have it for at least 2 years, before she could use it. She is in fairly good health for an 81 year old lady. She bowls 5 times a week and her worst medical problem is diabetes, which is controlled with medication. She does not have to take insulin. Would term life be better and if so, are there other companies that would accept her at her age? Most I have looked at, cut off at around 65 – 74. Is it better to not even worry about looking into life insurance for her at her age? You seem to be honest and fairly wise about all of this. Please give me your opinion.

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Neal Frankle April 3, 2013 at 6:54 PM

Allison, It’s possible to get your mom some life insurance and I’d be happy to speak with you about this offline. You can email me at neal DOT pilgrim AT gmail.com. But I don’t see why she needs the insurance. If she a decent amount of investments, what’s the purpose? Why spend the money?

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Eric L March 27, 2013 at 8:55 AM

So in a perfect world, with proper savings, you’re saying insurance is not a need? So if a married 35 year old with 2 kids who’s making 100k a year gets hit by a truck it’s all ok because he has 100k in his IRA? That’s crazy. Life Insurance, as far as I see it, is income protection in your working years to protect your family should the unfortunate happen. How can it be compared to car insurance? That’s completely ridiculous. How is a widow with kids going to continue their lifestyle with just savings? Seriously, that comment might be the most irresponsible thing anyone who gives advise has said in my lifetime.

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Mike March 27, 2013 at 11:36 AM

Eric,

With all due respect, I do not know where that scenario even came from. My point, if you read my whole post, shows I am a huge advocate for life insurance (term AND whole life). What I meant was in a perfect world all insurance would not be needed. However, the world isn’t perfect; people need help and guidance. Life insurance takes the risk off of the owners, we all know that. I mentioned other uses for whole life to rebuttal the argument that you shouldn’t have it. If you are 35 married with 2 kids making 100k and have 100k in a qualified plan you DEFINITELY should purchase insurance. I couldn’t say what type because there are hundreds of factors needed to make a recommendation. Car insurance was an example of insurance in general. I believe life insurance holds much more importance. I don’t understand how you processed my post, but I think you pretty much agreed with every I said. Life insurance is an essential tool, especially in today’s world and economy. Please see my last post which states how strongly I feel about it.

Thanks.

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Joe March 1, 2013 at 1:39 AM

Thanks Neal for clearing this up. I was searching a lot on the internet to find a good explanation regarding these insurance problems , and finally i chose to go with senior term life insurance , because it seems a better bet as you stated in your post.
Thanks mate

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Eric L January 14, 2013 at 10:46 AM

I also notice that a post or 2 of mine never made the thread. If we are going to have an educational argument for the better of the public, why not display the whole thing? Again, I think the facts are being dodged.

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Eric L January 14, 2013 at 10:44 AM

When have I ever said I was an agent? I’ve had a plan designed for me and became educated on the subject mostly because the information out there varies depending on who you speak with or listen to. I just mentioned that Anthony brought up good points and you are dodging them without any fact. You also show an example that supposedly confirms your stance yet you shut off the comparison when the permanent insurance gains its advantage. Still wondering why…..

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Neal Frankle January 12, 2013 at 6:19 PM

Oh…and by the way Eric….you started making comments as if you were a consumer and now you reveal yourself as an agent. I am confused by that.

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Eric L January 11, 2013 at 10:36 PM

Let me give an example so you know where im coming from. Anthony talks about using the permanent policy as a tool that enables you to spend your money rather than living off interest and trying to preserve principal. Address that and tell me why and how that is wrong without using generalities. Id like to hear more fact and less opinion. Thanks.

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Neal Frankle January 12, 2013 at 5:36 PM

Eric and Anthony – I have provided numerous examples – not opinion. Here’s a post that spells out why cash value insurance stinks. I have responded to Anthony on the issue of spending down assets. Let me repeat for the last time.

I don’t know how long you or Anthony have been in the business and I’m not going to insult you with making any guesses. But my experience is that people don’t want to spend their assets down – period. They don’t because they are smart to realize they don’t know when they will die or how much it will cost them to live 10,20 or 30 years from now. Despite some life insurance agent’s efforts, they are too smart for that. Your arguments seem a bit like justification to me.

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Anthony Iufffredo January 10, 2013 at 7:00 PM

Calling whole life insurance an investment completely devalues the most important component; a contractually guaranteed death benefit…Furthermore, how do you know when you’re young if you’re going to be someone who wants to leave money behind? Certainly I think we can all agree who we are and how we see the world will change vastly as we age and approach our own mortality. The most common concern I hear when I sit down with clients approaching retirement is worrying about outliving their money. Having a death benefit still sitting on their balance sheet allows the clients to spend more money because their is a contractual benefit waiting to be delivered upon the first persons death. The death benefit flows in to replace all that was consumed while the couple was alive.

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Neal Frankle January 10, 2013 at 8:04 PM

Whole life doesn’t help anyone who is worried about outliving their money – it makes the problem worse because they waste this money as I’ve pointed out countless times.

Most people aren’t really that worried about leaving a piling of money to others. The number one concern is to not outlive their money. That being the case, whole life stinks.

If you carefully read your own comment you will see the flaw. You assume that everyone wants to leave money behind and this is simply not true. I do agree that for those who do want to leave beneficiaries some money whole life might work.

My experience tells me that the people who most want to leave assets behind however end up with a very large estate outside the insurance. I’ve never met anyone who died with their only asset left whole life and I doubt if you have either with all due respect.

The very best use of whole life is for estate tax and that’s it. It’s OK for those who want to leave something to others but usually those people have other assets as I’ve said.

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Stephen July 23, 2013 at 8:54 AM

I think every one of your statements should start with “in my opinion” There are millions of very smart, very wealthy individuals that purchase whole life insurance from highly rated companies (specifically mutual companies who pay very good dividends.) My adviser doesn’t always do this, but I know him rather well, so he showed me his life insurance portfolio… Wow! He really believes in what he is selling! He had as much cash value as he did in his home equity…

My wife and I don’t live an extravagant life, but have what we need to pay monthly bills and set aside for retirement. Since that money is completely at risk… I would like to have money someplace that is both secure and going to make me a decent return, and hopefully never have to tap into it.

Whole life insurance is the perfect place to do so. I know that the dividends are not guaranteed but the company I purchased has been paying them every year for the last 161 years. Looking at my total rate of return on the cash value. It is ~5-6%. That is not great when considering, other potential investments…but when comparing to individual bonds or bond mutual funds… I’ll take the WL any day. And I have the benefit of having a growing death benefit for the rest of my life.

Flexibility: that’s what it offers…

This is working great in my situation, but everyone’s situation is different which means one approach (buy term and invest the difference) DOES NOT WORK FOR EVERYONE!!!!

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Neal Frankle July 25, 2013 at 6:36 AM

In the post I detail why I don’t agree with you. I am of course very happy your experience has been positive. Sadly, that’s the exception rather than the rule. And people who buy permanent insurance now aren’t going to get anything like 5% since the companies are dealing with very low interest rates now. Buyers will lock into very low returns. You bought the coverage when rates were higher yet you still underperformed alternatives. That’s always the case when it comes to whole life in my experience and that’s why it is not a wise choice.

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Anthony Iuffredo January 10, 2013 at 3:09 AM

Don’t you all see, its not whole life insurance vs hedge funds, etfs or mutual funds; its whole life in addition to all of the other assets you’ve accumulated. The fatal flaw is looking at every financial decision seperately. Nothing makes your portfolio stronger than a death benefit that will one day give you the ability to consume it fully if desired….I can see no better retirement solution than having the permission and freedom to spend down your nest egg only to have it replaced by the death benefit to a surviving spouse, children, grandchildren or any other charitable intent. The cash value which supports the death benefit, is not meant to be your best performing asset class (while I would argue at least with the best 4 mutual carriers in the last 20 years for most people it has been their bet most reliable asset). Therefore, one should purchase whole life insurance FIRST when their young and healthly so they can qualify for inexpensive coverage and as they mature and acquire other assets that don’t require having to go through underwriting, they will just have another bucket in their portfolio. Whole life with the right carrier has historically performed like a high grade bond however it comes with a death benefit which reduces the drag of term insurance costs.

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Neal Frankle January 10, 2013 at 8:01 AM

Anthony – I like your thinking but let me unthread this needle a little.

For those looking for an investment whole life sucks.

For those looking for life insurance to protect their family whole life sucks.

FOR SOMEONE WHO WANTS TO LEAVE MONEY AFTER THEY ARE GONE FOR WHATEVER PURPOSE WHOLE OR UNIVERSAL IS THE ONLY WAY TO GO.

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Rourke GT June 30, 2013 at 5:55 PM

I’m not an insurance agent nor in the industry, but I’ve read a lot of posts and comments that I’ve come across and I totally agree with your comment Neal. Investing in a whole life policy doesn’t make any sense. If you die, your beneficiaries will only get the insurance and not your investment the cash value. Whole life for family protection is too pricey for such a small amount and not enough coverage if the breadwinner dies at a young age leaving their love ones with inadequate coverage. If a person just wants guaranteed coverage for life, a whole life or guaranteed universal life would be the answer because as long as premiums are made when due, the coverage will continue until death.

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Ronald R. Dodge, Jr. January 14, 2013 at 10:04 AM

I an currently licensed in the Life Insurance business. While it may be good for the representative, in about 99% of the cases, I see whole life insurance as a bad way to go. Where I leave the 1%, there could be an investment type situation dealing with tax implications where this route may be the next best route. However, there are various tax rules because once the whole life insurance policy becomes a MEC, it’s always a MEC, which is bad for tax purposes. As for the number of people even remotely being in this sort of position to go the route of whole life insurance for investment purposes, very small percentage of the population.

In general with what I have known with whole life insurance, one keeps paying into it for their whole life (At least until the age of 100). There are some cases, where after there has been so much money paid into it after so many years (minimal of 7 years), it may continue to grow, but the cash value cannot reach the face value (aka reach maturity) until the insured is at least 95 years of age according to tax codes. This is also where it can get into such issues like Endowment Corridor (Rather if the payments continues to come in or not), espeicially if it is dealing with dividends from the insurance company.

I’m not even going to get into the growth aspect as you don’t grow your funds too well with this route. The cost to the consumer in at least 99% of the cases is way too steep. I seen what happened with my grandmother’s whole life insurance policy, which she was paying into it, then was struck with Alzhiemer’s Disease (which she had for a period of 14 years), then passed on. We never saw one red cent from that whole life insurance as it had lapsed due to her terminal illness, and they have the legal right due to non-payment. Is it morally right? I don’t think so, but they had the legal right. This makes it as a money grab for them, which just adds to my reasons of why I am dead against having whole life insurance policies outside of that one tax reason, which may impact potentially the top 1% to 3% of the US households networth value wise.

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Anthony Iuffredo January 14, 2013 at 11:38 AM

Ron,

The only reason one would purposefully MEC a whole life insurance policy is when the cash value becomes irrelevent and you’re attempting to maximize the death benefit. Otherwise, why create a taxable event?

I own Guardian Whole life…not all carriers and their products are created equally….They’re one of the few mutually owned companies that has delivered a profit (Dividends) to their policy holders (they don’t anwser to share holders) every year that they’ve been in business (Over 150 years). I expect over the course of my life to recieve a 4 – 5.5% ROI on my money and I also expect never to pay taxes on the growth. Contractually, I am guaranted my cash will never lose value, which means even if dividends cease to flow in, my account will still rise.

Based on today’s dividend rate, my policies will probably off-set in another 8 years which allows me to continue to build cash value and my death benefit, reinvesting the dividends OR I can allocate my dollars to other investment ideas, but at that point I will have the permission to take on risk.

While it may demand a financial committment (which I view as a good thing), I never view this as a cost or an expense, because I know that over the course of my life I will be able to spend more money and leave more money behind.

I never intended for it to be my only asset or my best performing asset, and because I got it in my 30s and receieved a great health rating, I probably do not truly yet understand just how fortunate I will be in future for having this as a foundational piece to my plan.

At its core, it carries contractual guarantees other financial instruments do not. When you build a house, you build it on a foundation of certainty. Other houses may be bigger in the beginning, but when the climates change and others have to rebuild, my house will weather the storm, just as whole life has weather the storm all of these years.

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Stephen July 23, 2013 at 9:04 AM

Ron,

If the policy lapsed and the family never saw a cent….It wasn’t a whole life policy. It was a universal life policy. BIG difference.

Anthony,

Wow, someone who actually understands how WL insurance works! I feel sorry for the people who blindly follow the advice of some guy on the radio… who has never met them or their family and will take no responsibility for what happens when one of them die.

People do need to understand that WL insurance is a luxury… not everyone can afford to buy what they need. But when you can afford it as a person in your 30′s…you’re gonna be really glad you did, when you are in your 60′s and later!!!

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Neal Frankle July 25, 2013 at 6:33 AM

Whole life can lapse under a variety of circumstances:

a. Owner fails to make premium payments
b. Owner assumes hypothetical values are guaranteed values. That’s not always the case either.

Neal

RCn January 9, 2013 at 8:21 PM

“The returns are terrible b/c the costs are high”? Really? so the millions of wealthy american’s use hedge funds to invest with a 2 and 20 fee scale unmatched in cost. This guys is really Bad!

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Neal Frankle January 9, 2013 at 9:59 PM

RC – sorry you missed the point. Why do you compare the cost of whole life (a terrible investment) to another terrible investment – hedge funds? How about to an ETF or mutual fund?

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Rosa Herrera October 2, 2012 at 11:12 AM

Before you buy into a plan, you need first to consider what the features and benefit of the plan at hand are and how it will fit in with your lifestyle and that of your family, especially when you are no longer around to provide for them. Here are some very important things to consider when shopping for term life insurance.

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Chris August 15, 2012 at 9:58 AM

Term insurance is a safety net if you die before paying off the house, bills, cars, etc., and building up enough money to retire on. Insurance companies want you to buy term because if you live past the term it is 100% profit to them. Most term policies do not pay out because the insured lives past the term. If you pay $400 per year for a 20 year term policy and you live for more than 20 years, you have given the insurance company $8,000 and have nothing to show for it (but you did have peace of mind for the last 20 years). There are even term policies that give you all of your money back if you live past the term, which means that it cost you $0 for a term policy. The insurance companies take your premiums and invests them. The money that they make on the investment covers the cost of the policies that do pay out and supports the insurance company for the 20 years that you pay the premiums. These policies are generally more expensive than regular term insurance, but you get all of your money back, so it does not cost you anything. Essentially you are giving the life insurance company your money and saying, “Here, invest this money for me, you can keep all of the profits that it makes for the next 20 years, but you have to buy me a term life insurance policy and pay me back the initial investment in 20 years.”

A whole life policy will cost more than a term policy because ALL whole life policies pay death benefits (as long as you pay the premiums and do not cancel the policy). As for grandma getting Alzheimer’s and forgetting to pay her premiums, Ronald R. Dodge, Jr., guess what happens if you don’t pay your premiums on a term policy? The same thing! If you do not pay your premiums for your term policy or for your whole life policy, you will lose it.

One good thing about whole life insurance, if you get the right policy, you know exactly how much it is going to cost you to keep the policy in place FOREVER. I have a policy that is paid up at 99, which means that I pay a set premium every year until I turn 99, and then I will never have to pay anything, because the policy is “paid up”. The rate will not adjust for old age or poor health, because it has already taken these factors into account. I know that if I live to be 99, I will have paid a certain amount to the insurance company for a death benefit of AT LEAST a certain amount, and I know that I will not have paid more in than I get out (I am dealing with my dad’s whole life insurance policies that he has where he would have to pay more for the premium to keep the policy going than the death benefit is worth [he would end up paying $250K in premiums for a $175K death benefit if he lived long enough]). I also know that by paying the set premium for my whole life policy, my policy will have a cash value that is guaranteed to be worth at least a certain dollars amount by a certain year per a GUARANTEED illustration provided to me in the beginning. That means that if the investment return on my premium does not perform as well as the company guaranties, then the company has to make up the difference to me out of their own pocket. If they do not, I can sue the crooks.

If you plan your retirement and manage your wealth responsibly and life goes according to plan, term may be the way to go. However, since life throws you curve balls, it may be a good idea to have something more certain than a term policy that expires in 20 years.

One thing the insurance company tells you is, “You can buy a Term policy that is guaranteed renewable, so you can always buy more time if your term expires and you need it.” What they fail to mention is that your new term policy may be for a shorter period and will cost you a LOT more than the previous one. The insurance company is telling you that they will issue you a term policy later on in life, even if you would otherwise be UN-insurable (say if you started smoking, got cancer, switched careers to be a Bering Sea crab fisherman, etc…), but they are going to charge you based on your current circumstance and they know they have to make the money back on your death benefit some way or another. If you can still afford the new term policy when this one expires and need more time, it would seem that your life plan is not going as you desired.

Heaven forbid that you or your wife, husband, or kid gets sick and you end up with hundreds of thousands of dollars in medical bills. You have to take a second mortgage on the house, or even sell it, and your term policy expires in one year and you can not afford to renew it. Imagine this scenario, your spouse gets sick and you have to spend every penny and sell the house to treat him or her. Your term policy expires and you can’t afford to renew it, you are un-insurable because of age and health, and you, the sole breadwinner, dies. Now you’ve left a sick spouse and children no home, no source of income, huge debt, and no way to pay the bills.

In the above scenario, if you have a whole life policy, you know exactly how much the insurance premiums are going to cost you for the rest of your life. You can factor in the premiums into your yearly budget. You may have some cash value built up in the policy to help pay the medical bills, and if you die, the death benefit will cover the medical bills and give your family some much needed money to survive off of.

I know that this is horrible scenario, and may seem unrealistic, but I can almost 100% guarantee you that this exact scenario has happened before and could happen to you. Ergo, Term insurance is a gamble and Whole life insurance is 100% guaranteed (if you do your research and get the right policy).

There are other benefits too, like tax benefits and what not, but I’m not going to get into that. Also, your death benefit can increase and cash value can increase over time. The insurance company trying to sell term will tell you that if you die and do not take out the cash value, they get to keep it. What they do not tell you is that your death benefit increases proportionately to the cash value, so, if you do not take out the cash value during life, your beneficiaries will receive it. The insurance company does not keep your cash value, they give it to your family.

That being said, if you buy a whole policy with a $500K death benefit which gains value and increases over time to have a cash value of $100K and a death benefit of $600K, you can take cash out the $100K to keep and use however you want and your death benefit will go back down to $500K. The death benefit can also grow faster than the cash value depending on the premiums you pay. I had an illustration drafted for me that guaranteed my policy to be worth $228K with a death benefit of $910K, but starting with a $500K death benefit. In this illustration, if I pulled out the case value, I would have more money than I put into the policy and my death benefit would still have grown by about $200K, and the policy would remain in place and my premiums would be the same.

The long and short of it is, buy whatever you want, I don’t care.

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Anthony Iuffredo August 16, 2012 at 4:55 AM

A long rant from someone who “doesn’t care”….Interesting….probably better to write, I care that you understand my point of view, but whether you buy it or not is completely your choice….

I actually care that I get my point across AND I just happen care that people plan appropriately for their own unique set of circumstances. We are all affected when people do not plan,just ask the two guys running for President.

I’ve been fortunate enough to work in a profession that is filled with passion and purpose, regardless if people are buying from me, I still want them to know the truth. However, only when people begin to ask the RIGHT questions, can they understand why it may or may not make sense for them. For some it will, but for most it may not.

Savings is the most important component in planning. The only chance any of us have to create a meaningful life during our working years and after when we retire is having enough surplus. Insurance is just a way to protect savings. Car insurance and homeowner’s insurance, disability coverage and life isnurance are all methods that enable us to protect a savings plan because life is so difficult to anticiapte. Shit happens and it happens everyday. Therefore, protection has to be not only taken care of first, PROACTIVELY, but as we evolve, it also has to be coordinated with who we are living into. I cannot tell how many clients I meet with who have the same amount of life insurance and liabilty coverage on life as they did 10 years ago when they made and had more than half as much.

A life insurance decision, like every other financial decision should not be made in a vacuum. Whether it be your mortgage, 401k, business or investments, all decisions should be considered holistically. This is extremely difficult to do when not working with an advisor who considers the big picture. And impossible to do on your own.

One should not consider owning a home or owning life insurance (Whole Life) for that matter if they cannot save money, or they have considerable debt or they cannot afford their economic life value in at least term insurance. Life insurance first and foremost is for an untimely death. However unlikely that may be, someone who has made financial promises of which would go unfullfilled by a premature death needs to purchase as much death benefit as he or she can qualify before purchasing a home or investing in their 401k . Our health typically trends downward as we get older so even if you do not die prematurely, your ability to qualify for coverage may one day be in jeopardary.

Second to the amount is the type. If a client is saving anywhere else, I would have them consider owning a part of their life insurance as long as they have first taken care of the correct amount of coverage first, including long term disability protection. The only thing worse then dying and having your family struggle financially is staying alive to witness it.

When you own your life insurance, it offers you certain financial guarantees that variable products do not. This type of contractual promise offers you a value that transcends economics. When you build your plan on the uncertainty in the markets (i.e. – real estate & stock), you go through life fearful of making financial decisions, in a constant wait-and-see mode. It is because whole life insurance has so little moving parts and calls for a financial commitment, that it not only delivers on its promise, it also allows you to move through life with greater confidence. We cannot see this when we make this decision and only the best advisors can help a client understand this concept. It cannot be illustrated or seen in a prospectus. Only those who are living in retirement with well funded policies can truly understand and appreciate the living value and piece of mind this strategy has given them.

I wish the stock market had greater certainty…I wish whole life insurance was as affordable as term insurance, I wish taxes stayed low and the price of goods never rose. But the world doesn’t operate this way and its our responsibilty to plan for the probable and protect for the possible. At least thats how I advise my clients.

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Anthony Iuffredo July 22, 2012 at 3:54 AM

While it is nobel to consider foreseeable “needs” or “goals” when planning one’s future, we will always shoot for far less than our financial potential. This has always been the fatal flaw in traditional planning and its damaging. Our objective should be to realize maximum utilization over all our resources with the greatest degree of certainty. How do any of us know what our lives will look like in the future, let alone the world and the numerous financial variables inside it?

The addition of whole life insurance with other financial products can be extremely powerful. It can unlock these other financial products and offer the family options, hedging opportunities and finally some certainty has an economic value not captured in a prospectus or illustration. Most “boomers” on the cusp of retirement who participated in the Buy Term and Invest the Difference strategy are faced with some difficult choices…because there is no longer a death benefit to back up their assets, and no time table for how longer they will live, people are locked out of fully enjoying everything that they worked so hard for. Those retirement choices we cannot see while we are we are still working include living off fixed income and make compromises as costs rise, go into principal and live worse off each year OR do I spend down princial and run the risk of running out of money and leaving my wife with nothing.

I can only speak from Guardian (a mutually owned, participating Whole Life Insurance Company)….When a whole life premium is paid, a portion of that premium is used to cover comp and mortality experience…what’s left over goes into a general account largely invested in conservative areas, such as gov’t and corp bonds. In addition to the performance of the general account, a dividend is calculated each year with surplus of people pooled together who haven’t died,, loan interest and outside profitable business (i.e. – Annutiy/Group Healt/Dental/Vision, etc.). Unlike market based assets that rise and fall, once a dividend is declared and credited to their policyholder, it can NEVER be taken away. It becomes a contractual component to the policy and the next declared dividend grows from that benchmark.

You have choices as to what you can do with your dividend…one that I often recommend is rolling the dividend back into the policy. This buys Paid Up Additions, which will further enhance the cash value and the death benefit. As those two accounts grown (cash value supporting the death benefit, you are NEVER taxed on the accumulation (1099 are not triggered each year the policy grows). You can be taxed depending on the distribution of those values. For example, life insurance is “FIFO” (First in/first out)…meaning every dollar may be distributed up to basis, free and clear of taxes while the remaining growth can be borrowed without ever realizing a tax. Of course loans aren’t required to be paid back and just get deducted from the death benefit (which was rising) when the policy holder dies.

Another dividend option worth considering, once the policy has been offset (when there are enough compounding values from Paid up Additions, premiums are no longer required to be paid to keep the policy in force), one can receive the dividends as income or an opportunity to reinvest in other areas , like clipping coupons from a highly rated bond.

While this is not an advestisment for Guardian its worth noting that not all life insurance companies and their platforms are created equal. A guarantee is only as good as the company that stands behind it. Guardian’s two primary responsibilites are to pay claims and protect policy dividends. They are in the business of delivering on the promises they have made to their policyholders. For over 150 (VOLITILE) years, they have NEVER missed a promise and although dividends are NOT guaranteed, Guardian has always found a way to pay them.

If your worst performing asset is non correlated to market volitility, guaranteed to NEVER drop on value, which means will rise each year, is creditor protected from lawsuits (State specific), grows tax deferred (and can be accessed tax free), self completing from disability or illness (Waiver of Premium protects the policyholder who cannot work due to an injury or illness and can no longer work) AND has a tax free death benefit guaranteed to be paid upon your death (Probate free)…..how is the rest of your portfolio looking?

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Ronald R. Dodge, Jr. July 20, 2012 at 7:18 PM

Ryan, even with the information you provided, it’s not really enough to say as you have to look at your whole picture, not just part of it.

However, given how much you and your spouse is putting away (I say your spouse because of the ROTH IRA in her name) into retirement funds, even by the very argument of why to get whole life insurance for final expenses, I would highly doubt you would need that. On the other hand, getting term life insurance may still be a good idea. As to how much for term life insurance, that again has to be answered by looking at your whole set of circumstances.

I would rarely recommend getting whole life if I would even ever recommend it. That’s because you can put the cost of final expenses as part of the other costs to be covered by term life insurance, which then with term life insurance, you invest the difference of what you would otherwise pay for with whole life insurance and you let that money to build up.

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Ryan Smith July 21, 2012 at 5:36 PM

After reading the article and all of your wonderful comments, it does make sense for term and not getting whole life–looking into more details that I didn’t/forgot to disclose on my first post.

This site is certainly book marked and I’ll continue to monitor this.

I’ve got the answer I came here for and thank you all :-)

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Anthony Iuffredo July 20, 2012 at 10:04 AM

It is entirely possible and quite common that the stated price of a product can be low (term ins), but the economic cost to be extremely high!

The only similarity between term insurance and whole life insurance is that they have a death benefit. Otherwise, one is a cost (unless an unlikely loss occurs) while the other is an asset. The trap that most people find themselves in when comparing both strategies is solely analyzing the IRR of Cash Value versus outside market returns. What’s not calculated are the compounding costs associated with term insurance and the taxes that are generated from the outside investment. When you couple the loses of term premium costs, taxes paid out of a different pocket AND the lost opportunity of those dollars, its difficult to see the benefits with taking on all the risks in the market. When you own Whole Life Insurance with a mutually owned company (i.e. – Guardian, Northwest Mutual, Mass Mutual & NY Life), the ability to generate dividends (profits) fall on the carrier’s shoulders. Their primary function is to pay claims and protect policy holder dividends. For over 150 years, the fore mentioned companies have delivered profits to their policyholders which can be reinvested into the policy to offset premiums or create a much more robust financial strategy.

(Guardian Life has only delivered a dividend under 7%, 5 times in the last 30 years. Where else can clients get that type of growth without participating in a volitle stock market?)

The most valuable time to OWN life insurance is when its no longer needed to replace income, pay off the mortgage or educate children, because it then allows the policyholder to spend his nest-egg. The Buy Term & Invest the Difference strategy’s fatal flaw is when the death benefit falls off the balance sheet and one is left with ONLY their money, behaviorally they will try not to spend principal. This is incredibly difficult to accomplish due to the unknown duration of longevity and the subsequent variables (inflation, market volatility, taxes, unforeseen life events) people face to make their money last 25 – 30 years, joint life expectancy. When a guaranteed death benefit is waiting to be paid on the first person’s life, the policyholder now has the peace of mind to know he/she can spend their money without being fearful of running out of money or leaving their spouse destitute.

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Neal Frankle July 22, 2012 at 1:08 AM

You state the issue very well. If you compare insurance to insurance – term wins – depending on how long you need the insurance for.

If you compare investment vs investment – other lower cost investments win vs whole life. Again, I don’t know about the “Crediting” system of these companies as it relates to guaranteed surrender cash value. That’s all that matters. Many two-tier annuities credit all kinds of interest but charge exorbitant fees to surrender.

Also, it’s important to consider if you need to own the insurance or not before discussing how cheap or expensive it is to do so. My plan is that I won’t need any insurance (G-d willing) after a certain time and as such, my term runs out. I will be very happy if I make those premium payments and don’t have a claim. The service provided is family continuation.

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Ryan Smith July 19, 2012 at 2:40 PM

Hello, I have read through these comments and love the support you all provide:

Here’s my situation:

I’m 27 years old and have a new born due next month. I make about $77,000 annually. 15% of that goes into my company 401K. I max out my Roth IRAs for me and my wife each year ($10,000 total).

We fully pay off all credit debt monthly & have like $6,000 left on a car payment and $90,000 on the house.

MY QUESTION: Should I consider buying term, whole, or none at all? I can’t grasp this stuff…

All I know is I’m discplined and will never fall into major debt/bankruptcy.

I also hope to make $125,000 annually when I reach age 35.
(I’m not a snob, I respect everyone and get along well with people, and am very cautious–just so yo don’t paint a different picture of me hehe.)

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Neal Frankle July 19, 2012 at 9:36 PM

By the rules of the game, I can’t provide specific advice here. Read this, it will answer your question I think. I think you will understand all the TERMS (get it?)

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Ryan Smith July 20, 2012 at 1:04 PM

Thank you :-)

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Eric L July 21, 2012 at 9:51 AM

Ryan,

Im no expert but why are you putting away so much money in a 401k and IRA? Atleast the Roth IRA doesnt hurt too bad but the 401k defers taxes to a seemingly higher rate in the future. Not only that but what happens if you need cash? Your $ is now loccked in a box for a long time and if you need it you will pay and extra 10% to get at it. 401ks were GREAT when the top end tax bracket was 70% but Im not so sure it makes sense at 35%. The whole saying “max out your 401k” started in the late 70s when it made sense. I’d look at a historical fed tax chart and see if putting money in a 401k makes sense to you now. I don’t see the point.

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Ryan Smith July 21, 2012 at 5:33 PM

My company does a 401K match, but that match is slowly disappearing. When and if it does disappear entirely, I’ll be sure to see if it makes financial sense.

We have an emergency fund of about $50K saved up that is easily accessible so we are going to try to not touch our retirements til retirement.

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Ryan Smith July 21, 2012 at 5:34 PM

I clicked Submit too early:

Thank you for the advice!!! ;-)

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Neal Frankle July 22, 2012 at 1:02 AM

You are very welcome

Daniel Zabrowski October 4, 2012 at 11:24 PM

Hey Ryan once you get to An income where you an no longer contribute to au roth than permanentyou life insuinsurance become your best tax haven! I have not heard much about tax diversification but with perm life of all types the company set minimum premium but the I.R.S. sets the maximum premium. Your a smart guy so i am surebyou candeduct that this is because I of significant tax benefits …..if you want to email me i can fill you in on more and i wont sell you anything I just think most peoe in here dont know what there talking about i personally overfund my life insurance for the purpose of financing large ticket items like cars or boats…my personal goal is to refinance my house in 5I years with my life insurance …..so email me if you would like….take care Dan

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Neal July 19, 2012 at 10:04 AM

Good points Eric/Evan. If the guaranteed rates are really guarantees – NET OF EXPENSES…..I have no problem. But get that all in writing. Let us know!

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Neal Frankle July 19, 2012 at 8:29 AM

Eric, good question. It depends on the source of the retirement income, the return and the real return on the insurance. Lots of moving parts.

Based on my experience, I would not suggest you build your retirement around cash values of whole life. You might have to go to work for your life insurance agent if you do!!!!!! (jk)

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Eric L July 19, 2012 at 8:36 AM

HAHAHA. Yeah, I’m not aiming to use Life Insurance as the center piece of my retirement plan. I have, hopefully, 30 years til I pack it in so it gives me a ton of time to see how the cash value grows if I choose this strategy. Mainly, I’m trying to avoid living off of interest because its all taxable and I think taxes are going up and up and up. If the cash value grows at the guaranteed minimum, it seems like a great strategy to pull from it on the back end so I can’t outlive my money. The presentation I received was very unique and on paper makes a ton of sense assuming the guaranteed value is really guaranteed. I’m not going to focus on the “current rate” on the illustration because Im a skeptic.

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Evan July 19, 2012 at 8:44 AM

Eric,

I am with Neal on that one! Can’t be the focus (even though some Life Insurance agents push it that way), but imagine if you could take 50 or 100K out of the policy rather than out of your retirement account during one those stomach turning years where the S&P is down 10 or 15%

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Eric L July 19, 2012 at 9:13 AM

Evan, Thats why I like having a % or my plan out of the market. People love to quote averages when it comes to returns but it never works that way. When you get in and when you get out, to the day, is what you gain or lose. I love the market but I understand the risks involved and my idea of diversification is money in and money out not mixing low risk and high risk. Now the real issue is, where can I put my money that I can access without risk? Cds are paying squat, bonds have to be held to maturity to not contain risk, etc. Life Insurance seems to be the best option right now for me based on the strategy I’m being shown. I realize there will be a liquidity issue for a few years but Im in the position to weather that time issue and then some hopefully.

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Ronald R. Dodge, Jr. July 18, 2012 at 6:50 PM

Eric, when they setup your policy of whole life insurance, they build into it a certain percentage of increase. However, what they don’t tell you, what could you really be earning if instead of you paying those premiums, with that same money, what could you be earning if you put it to other financial areas?

The inflation rider would be a type deal that increases your face value amount as each year goes by, not the rate of increase of your so called cash value in the whole life insurance policy. That inflation rider not only applies to whole life, but also to all other life insurance policies as it pertain to the face value amount of the policy.

What you describe, you have to separate that change of cash value over the year into 2 parts. How much of it is due to the amount applied to it as a result of your premiums (Has to be looked at on a case by case as there are various different scenarios for how much is paid towards premiums and cash values and how much of the premiums is to line their pockets) and how much of the increase in the cash value is due to the percentage increase by way of so called investment or the guaranteed rate of increase. It is only then can you really calculate the so called rate of return on the cash value portion of your whole life insurance policy.

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Eric L July 18, 2012 at 9:08 PM

Ronald….Im not quite sure how to calculate what you are asking. I can see the guarenteed IRR in the illustration and it makes sense to me looking at the cash value. I searched google for a list of available riders and an inflation rider is no where to be found minus 1 vanilla blog written by an anonymous source. Im also still not sure where you get a 7.2% inflation rate or that the cost of living doubles every 10 years.

Anyway, Im not trying to debate with you. I’m asking Neil for his thoughts. With all due respect, Im not sure you know what you are talking about.

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Ronald R. Dodge, Jr. July 18, 2012 at 10:02 PM

No problem Eric. I may not have all of the information as I have only been in the industry for a short time period, but on the other hand, we also had to go through 40 hours of classroom stuff and take the 2 part state exam getting at least 70 on each part individually. I received the scores of 96 and 100 out of the possible scores of 100 and 100 respectively. It only took me once to pass the 2 parts while I understand many of my colleagues had to take it 2 times to pass it.

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Neal Frankle July 18, 2012 at 10:36 PM

I am doing a follow up piece on term vs whole life based on guaranteed values .

I have never seen any life insurance with inflation built in. Also, the historical inflation rate for the last 80 years is about 3.2% . I hope this helps.

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Eric L July 19, 2012 at 8:19 AM

Yeah…thats what I see Neal (sorry, been typing Neil).

What I’d like to know more of, are the tax issues with living off of interest in retirement vs. spending down assets then tapping into a life insurance policy tax free on the back end. That was the strategy I was shown and I’m curious to hear a 2nd opinion. The illustration I have shows PUAs and rolling dividends back into the policy raising tha cash value and death benefit annually.

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schlankae July 18, 2012 at 4:30 PM

What about a Covenant II, Dividend Paying whole life policy, with Paid up Addition rider? From what I hear, as you build cash value from your premiums, each year the trustworthy company (one that has paid dividends every year for almost 100 years), also pays an increasing dividend. Year by year, the cash value goes up, as well as the death benefits for the beneficiaries. You can use it and draw from this cash value wthout being taxed, be your own banker, etc… (dont pay the bank that interest on your car loan. Borrow from yourself. ) You may get better return rates in a retirement account that you’ll have to pay taxes on and cant touch until you retire…. Then again, How will the market be next year, or the year after? Up? Down? These policies may at least show a modest return ‘guaranteed’
So you can pump $$ in as premiums, potentially get a modest dividend, use it tax free if you need it for big-ticket items…. then the grand prize, the ultimate death benefit, which has also been growing for X number of years, is tax free to your beneficiary when you die.

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Eric L July 17, 2012 at 11:15 AM

My agent told me that whole life is the best out-of-the-market investment where interest grows tax free. The only alternative for tax free growth without market risk are muni’s and T-bills. Why wouldn’t I want a 4% (or greater) IRR tax free in a whole life policy so I can draw from it tax free in retirement? From what I was told, I could spend down my other assets to lower my taxes and then pull from my policy in retirement. It seems like it saves me a ton in taxes. Why do you think this is a bad idea? Im guessing either my agent is giving bad information or you are just uneducated in the functionality on whole life.

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Neal Frankle July 18, 2012 at 4:21 AM

Your agent is probably showing you an illustration. IN reality, what happens is far different. The expenses outpace the returns so you earn less than the cost of the insurance. As a result, you won’t build up any cash value.

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Eric L July 18, 2012 at 7:54 AM

I was given an illustration. It shows a guaranteed rate of just under 4% and a current rate of just under 5%. Are you saying that the guaranteed rate isnt really guaranteed? Im also not seeing how its an “expense”. I dont consider contributing to an investment an expense. Term seems more like an expense seeing as I never see that money again. Am I missing something? How won’t it build up cash value?

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Neal Frankle July 18, 2012 at 8:48 AM

I am going to do an in-depth post on this exact point. Keep your eyes open. I need to do some research to illustrate exactly what you are asking.

Whole life as two elements; the life insurance expense – same as term and the investment element. If the expenses are greater than the return, your cash won’t build. Does your policy guarantee the minimum? Does it guarantee the expense?

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Eric L July 18, 2012 at 9:30 AM

Thanks Neil. A 2nd opinion is always welcomed. I did a little research and what i found was that the cash value is designed to equal the death benefit by age 100 in regular whole life. I see some companies have raised the age upwards of 120 to avoid handing you a check at 100 for the death benefit amount killing the tax free benefit to the beneficiaries. Thats why it seems the cash value has to grow.

Ronald R. Dodge, Jr. July 18, 2012 at 10:30 AM

Eric, Neil is right about the fact you may not be taking into account of the part of the premiums you are paying and it doesn’t go towards the so called cash value or investments. For me, I look at what is my total cash outflow, and what is my return for that total cash outflow. Yes, it is an insurance policy, which that by it’s very nature will mean one is also paying for reduced risks, but even with that in mind, one still need to factor in what is the real return, which I’m with Neil, I have also determined the outflow to be greater than the return, once you factor in such things like inflation rate and even look at the aspect of what you could have otherwise earned on that money.

One such example, AIL has a whole life insurance policy let’s say it’s for a 35 year old male, and the basic whole life insurance has a face value of $35,000 with no inflation rider. The premium on it is likely to be $52.00 or there abouts per month, which works out to be $612.00 per year. On the surface level, this looks like a good deal because that Annual cost of $612 times 35 years means up to the age of 70, the owner would have only paid $21,420 for it, but when you factor in inflation alone, you can quickly see how that $21,420 is quickly much higher than the policy level of $35,000. Not only that, but you figure the total expense for someone when they pass away is about $10,000 give or take by today’s dollar value, which assuming an inflation rate of 7.2% (Cost of living doubles every 10 years), in 35 years, that would leave final expenses to be about $107,000.00. As such, is it really a good idea to pay for such policy that is much more likely to come up short anyhow as $107,000 is just a bit more than 3 times the amount of $35,000?

If you looking at Universal Life Insurance, which has an investment option, insurance companies typically don’t perform nearly as well as other investments, at least not from the perspective of the policy owners.

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Eric L July 18, 2012 at 1:02 PM

I still dont get what inflation protection you are referring to Ronald. Im only seeing that rider for Long Term Care policies. Im also not interested in Universal Life at all. Its a horrible way to buy permanent protection. Also, I found that each carrier has different rates and different earnings to back up their policies. AIL might not be the best carrier (?) so quoting them is not really relevant.

Im also not understanding where you get a 7.2% inflation rate. Inflation has been closer to 3%(http://www.usinflationcalculator.com/inflation/current-inflation-rates/). When you say cost of living doubles every 10 years you sound like all the failed mortgage brokers who took a decade avg and told consumers that real estate doubles every 10 years. In reality it doesnt. A decade like the 80s greatly affects the avg and skews the numbers.

Ronald R. Dodge, Jr. July 18, 2012 at 9:33 PM

On various lief insurance plans, people are concerned about their face amount not covering their final expenses as a result of inflation. As such, life insurance companies has developed the inflation rider, which policy owners can purchase as an add on rider to their policy, which would raise their face amount annually. As obvious when policy owners purchase this rider, they also have to pay more in premiums for this rider.

I don’t know how much you have known about life insurance or with annuities, but with both products, there are a whole host of riders that can be put with either product, but that will also either drive up the premiums (In the case of life insurance) or drive down the periodic benefit payments (As in the case of annuities) for each rider that is added onto the policy. The inflation rider is just one such rider of several different riders there are out there.

While I am not an expert in the field of life insurance, having been through the training courses, been licensed as a life insurance agent in the state of Ohio, and see some things from the agent side, it certainly has given me some heads up on the set of various types of such policies there are out there. My license currently is set to expire in October 2013.

As for whole life insurance, about the only exception I could see for potentially purchasing a whole life insurance policy was if it involved having to deal with tax strategy, but that would only apply to those that are in the high income tax brackets with everything else either maxed out or not allowed to do, and even then, I am not sure if it would be worth it as there are also various tax implications that could ultimately end up causing any gains on life insurance to end up being taxable, if there are distributions involved during the life of the policy owner. There is this saying with life insurance, once a MEC (Modified Endowment Contract), always a MEC. That is one thing you DON’T want to have happened, your life insurance policy end up becoming a MEC, which can happen in a number of different ways, such as the policy scheduled to endow (Or for the layman, the cash value reaches the face value amount of the life insurance policy) before the age of 95 or the pay period is shorter than 7 years. These are the 2 big ones that you definitely want to watch out for, but then there are ways to get around endowing before age 95, but too complex to go into with this blog.

Ronald R. Dodge, Jr. July 18, 2012 at 9:49 PM

When I mention about the 7.2%, while the direct cost of products may not necessarily go up by the 7.2%, as that may be more like about 4% or 5%, the rest of that is made up by increased demands on households by either society itself or the government. While some people claim such costs are washed out by the greater efficiencies, that would be true in the business environment, but not true in the household environment. Others say such increases in costs actually saves society some money, which is true at least to some extent indirectly, but it’s only indirectly and it still means having to put additional hardship on the struggling families. One such case, look at the various safety rules and how often those rules have changed to the point those safety purchases ends up running between $100 and $2,000 every 6 to 7 years just to keep up with safety codes depending on what safety products households are more or less being forced to purchase legally and how many of them based on that household’s set of needs based on the requirements of the laws.

Also, look at convience items. Yes, costs in some ways have come down, but look at ways how the phone industry has changed society and society now has placed greater demands on households to have such things like cell phones either in addition to land lines or as replacement to land lines depending on each household’s circumstances. In this regards, startup and ongoing charges actually went up, and yet, where is the so called savings?

As such, the CPI values that’s given by the government, that’s only a part of “REAL” inflation rate, as it only takes into account the inflation portion, but it doesn’t factor in the additional costs of the additional standards/requirements placed onto households by society/government over time. Granted, some claim no one in society is really telling them they have to purchase such things, but rather it’s one that creeps up on you via expectations by society and if you don’t follow through, you go without other things that can actually hurt you in the long-run. Yes, you have to be careful not to get carried away with this thinking, but you have to keep it in the back of your mind too. How often do you hear of someone saying another such person is too old fashion?

Frank July 17, 2012 at 5:39 AM

I’ve been paying into a whole life plan for about 5 years. I was lead to believe that this is essentially my money, like forced savings. If so, how do I withdraw funds from the whole life account and when can I start doing that?

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Neal Frankle July 17, 2012 at 6:14 AM

You can ask for an “in force ledger” to see how much your policy has grown – and how much the insurance company has eaten up in expenses.

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Frank July 18, 2012 at 7:33 AM

is it highly probable that the whole life policy can at least grow in line with inflation? that’s all I am looking to achieve, aside from obviously having insurance. so $500k today is worth $500k in the distant future. I plan on using that cash to offset cap gains on my retirement accounts. bottom line, I want the insurance, but why not build equity (through whole life) as well? I have a traditional savings account, 503b, 401k, IRA, stock trading account, long term bonds and whole life in which I allocate monthly income to.

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Evan July 18, 2012 at 7:36 AM

Not only is it probable it is more than likely as most Whole Life policies have a guaranteed portion. Do you have an illustration there should be either two columns or two different projections?

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Frank July 18, 2012 at 7:49 AM

Yes, and they actually beat inflation and gives me a few point return, better than a CD or tradional savings account. Just trying to understand if this isn’t worth it for example, if I pay over a life time $500k into the policy only to have “the equivalent” to $250k in the end….then obviously I would not continue to contribute my money to the whole life. That’s what I believe the author is saying. is it not?

Ronald R. Dodge, Jr. July 18, 2012 at 10:08 AM

You will want to double check into that as many times, lief insurance will NOT keep up with inflation UNLESS you purchase the “Inflation Rider” with your insurance policy.

Another misconception about whole life insurance, some people then when the owner passes away, the heir gets both the face amount and the cash value, when in actuality, the heir would only get the face amount less any money the owner withdrew from the cash value without repaying it back. As such, the only real value there is with that cash value, it shows how much money the insurance company would have to pay from their own money by taking the difference of the difference of the face value and the cash value assuming there was no withdrawals of cash from the cash value.

For me, I am not a fan of whole life insurance. I know I view life and money differently from most other people and I am on the very disciplined side compared to most people. A big part of that is simply because of what I been through within the first 25 years of my life including having lived strictly on SSA benefits. The only difference of me having lived strictly on SSA benefits (Disability income be though), and an elderly person living strictly on SSA benefits, I was at least in relatively very good physical shape so as I could withstand some of the weather’s extremes including having to deal with summer temp of 95F with 95% humidity and smog alert with NO A/C. As I sat down on the hard floor drinking home made version of gatorade, which I ended up drinking about 5 quarts of that a day as a result of all the sweating that took place in such conditions, I was like, “This is okay for now, but I don’t expect to be in that kind of physical shape to be able to withstand this sort of condition as an elder.” That took place at the age of 22 in the summer of 1993 when I had thought about that very thing.

Today, many people in communication with either me or my wife are wondering how we are doing it with me on unemployment, us raising 5 girls, and me going to college full time doing as well as I am in college. A large part of that is because of the fact I been so disciplined about the financial side of things, we have actually been able to minimize the fall of the networth value during the last 14 months I have been on unemployment, and I am expected to be on unemployment for another 5 to 7 months.

We have managed quite well despite all of the things that has happened. However, part of that has to do with the fact, I built up an emergency fund into the 5 digit figure, which at one point of time, I did withdraw $400 from it, but since, have more then made up that withdrawal. But then again, I have had to take out student loans, thus the real reason why our networth has actually dropped. While Accounting says I am to put that cost to the intangible asset at the value paid for it and then amortize it, from a personal finance point of view, I am directly expensing it, because just like the first time around in college, it wasn’t my college education that got me the employment, but rather it was my skills with computers that got me the employment. However, this time around, they are wanting that piece of paper else I get nothing.

Many people make the argument, I am investing in myself by doing what I’m going, but the problem I have with that view point, I already know a very good chunk of the information for what they are providing in the various courses. As such, other than for me shelling out all of that money for them to give me that piece of paper, it’s not really improving my knowledge level all that much, and that’s with me carrying a GPA of 3.89 on a 4.0 scale. While the early level knowledge was truely taught to me with regards to accounting, but much of the information with these later classes other than for auditing has been more or less the same information as in earlier courses, just taught from a different perspective with slightly different rearrangements to the information, thus no real learning taken place as I was already doing all of that stuff long before having these later classes. Even with the IS classes, these classes are more or less just review as I more or less self-taught myself how to do programming work as a result of being forced to do things for my own self within the first 25 years of my life and not being able to depend on anyone for anything. As such, I had to be self-sufficient and strictly depend on my own self.

I had found computers to do a lot of the work for me, which I learned as early as my 7th grade year when I was introduced to BASIC by my special ed teacher in October 1984. She didn’t teach me the programming language, but rather she had a sheet with codes already typed out and I was to type them into the editor character for character and then she showed me how to run the program. She didn’t even have the slightest idea rather if I was going to pick it up let alone take it all the way, or if I would be just dumb founded. Seeing that program worked as I did, that’s what got me fascinated into the software side of comptuers, which then the rest became history as I just took it by the horns and learned the stuff on my own after that. During my 8th and 9th grade years, I didn’t get much of a chance to work on the computer, but yet, when I had computer literacy in the fall of my sophomore year of high school, I outwitted my teacher in the subject matter within the first 2 weeks of class. There has yet to be a software course for me to have a hard time in or that I don’t exceed it pretty quickly.

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Eric L July 18, 2012 at 10:16 AM

Ronald. Im trying to find an “inflation rider” for whole life and I don’t see it anywhere except for Long Term Care policies. Anyway, if inflation has averaged about 3% and the quaranteed growth rate in a whole life policy is around 4% it would seem that adds up to inflation + 1%. So without this rider I can’t find, it would seem it does keep pace with inflation and then some.

Matt F. July 17, 2012 at 12:02 AM

Daniel,

Aren’t dividends a misnomer? Dividends that insurance companies pay aren’t really dividends. It’s actually the insurance company returning overcharges to the insured. Why do I say this? I receive investment dividends every year on stocks I own. I then pay the government taxes on those earned income dividends. I receive a dividend from USAA for my auto and personal articles floater as well as from northwestern mutual on my whole life and term life policies. I have never paid income tax on those dividends!!!! If it was truly income the US Treasury would want a check from me for their cut on that income. So as I don’t pay taxes, it is not income but a REFUND of what I was overcharged each year for my premiums. Or do insurance companies have some sort of US tax exemption? USAA is also a bank, so how is that classification broken out if there is tax exemption for insurance dividend income.
Thanks!!

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Neal Frankle July 17, 2012 at 6:15 AM

These are all really good questions. I will write a post on this issue. Thanks!

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Mike C July 19, 2012 at 11:55 AM

Dividends are taxed once you take construct receipt of the money. If the money is put back into the policy you do not get taxed on the dividends.

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matt f July 20, 2012 at 7:19 AM

So, is the check i get taxed by USAA and I only get the net amount as a dividend? if no, then i never pay taxes on the dividend, as i don’t get a 1099-Int form from USAA at the end of each year to use when filing my income tax. On my life insurance, i guess that is a dividend i never see as it is rolled back in to the policy. so thanks for drawing my attention to that fact that it isn’t a distributed dividend. still not sure on the USAA insurance one why i get what appears to me an untaxed dividend check each year, other than the fact it is really just an overcharge that i am being reimbursed for.

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Mike C July 20, 2012 at 9:26 AM

I have to correct my previouse statement. Dividends are only taxable when the yearly dividend is more than the amount of premium paid in that year.

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andre July 10, 2012 at 6:25 PM

The concept of “life” insurance providing anything other then “death” insurance seems like a bad idea. There are so many variables that go into a life insurance policy, by complicating it more the consumer makes poorer and poorer choices. If the insurance companies want to allow us to make informed choices they would open up there actuarial tables and say this policy makes the most sense for you based on our data, and the data you have provided to us. Lay it out black and white. Car insurance doesn’t build up cash value, neither does health insurance, why life insurance?

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Daniel Banks February 15, 2011 at 11:26 AM

Hi Ronald,
Thanks for your response. I would certainly not advise anyone to purchase a wholelife policy who cannot pay thier expenses and who has debts such as credit cards and who does not have an emergency savings. Those things are primary concerns and should be addressed first and foremost. I simply suggest a small whole life plan, 25 or 50k as a good idea for when thier term expires and becomes too expensive to renew so that they have some insurance for later in life.

I also suggest purchasing it from a good company that pays dividends such as Mass Mutual, Northwestern or Guardian life. The dividends grow the death benefit and help address one of your concerns which is inflation. Secondly, these policies allow you to select an option which will pay premiums from the cash value in the event the premiums do not get paid. This helps prevent a lapse such as with your grandmother. Another planning tool for an aging relative is a Power of Attorney which allows a person to act on thier behalf financially so that bills get paid.
I merely suggest a small whole life plan to anyone who does not have a crystal ball to figure out when they will die or how the market will perform. I own it myself and also own a large term policy. It’s part of a sound financial plan and goes along with a will, POA, emergency account, real estate and investments. There should be no all or nothing plan. I believe that is called putting all your eggs in one basket.

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Ronald R. Dodge, Jr. February 14, 2011 at 5:27 PM

Daniel,

I have looked at various stuff, and I found whole life at least in the short-term to be way expensive with a bunch of gotcha’s in the terms. Yes, as you stated, term can be quite expensive too, but only in the long-run. Hence, you have the con and the pro of both sides.

With TERM, it’s expected you only need to have that coverage for a limited time period until your wealth is built up.

PRO: Not expected for entire life time, thus can be knocked down as time progress.

CON: Rates goes up as time progress with each renewal

With LIFE, it’s expected you need it with your entire life time.

PRO: It’s there for life as long as you have it and keep up with the payments.

CON: If you become incompetent, what happens to this policy? Chances are, the payments stops and there is no recourse as the insurance company has pocketed all of that money with no benefits paid out.

If you don’t keep up with the payments, you generally lose everything.

I know this cause of the situation with my own grandmother as she became incompetent with regards to her having Alzhiemer’s Disease for a period of 15 years (when she was officially diagnosed with it, she was already 5 years into it and already in the middle stages of it). As such, the payments ended and the benefits were never paid out. She passed away last year almost to the date.

Another con to Life mostly, but also to Universal, Life has no adjustment for Cost of Living or Inflation, and the performance of Universal with life insurance companies are typically pretty low as far as the consumer side is concerned. I know it’s insurance, thus there are risk factors, but when I compare, costs still outweigh benefits on an after risk basis factor into it.

Another problem with getting life insurance. It’s under the pretense you need it until you have built up the assets outside of life insurance to not need the life insurance anymore (more so TERM in this case). However, if you have enough income to realistically pay for such insurance, many people look at you like you are just risk taking and you totally disregard risks. I’m sorry but if the following applies, I won’t be getting life insurance:

If I have to choose between survival expenses and life insurance, I have no choice but to go with survival expenses (I been in that boat and don’t want back in that boat).

If I have to choose between paying the minimal on debt or get life insurance, I will pay the minimal on debt.

If I have to choose to get debt within control or pay for life insurance, I will pay to get debt within control

If I have to choose to build up a realistic emergency fund or life insurance, I will choose the emergency fund over life insurance.

If I have to choose to build adequate retirement funding as my self study on retirement including risk fastors both in retirement years and employment years, then I will choose building up retirement funding over life insurance.

Why is this?

I don’t want to end up literally in survival mode for my entire life only to be paying for life insurance that doesn’t even benefit the family while I’m living. Yes, anything can happen, but I also look at the odds of what’s the chances of such things happening.

One such problem I have had with life insurance companies, many of them give such stories (which only take one instance for each company to be able to use it as a true thing) when some family got some policy and then some freak thing happened the next day to the primary breadwinner of the household. I’m sorry, but what’s the odds of that happening. That would be like, yes, I could be getting into my car to be leaving work and someone could shoot me dead right there on the spot, but what’s the odds of that happening? Not very good given my employment place isn’t in a bad area.

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Don March 10, 2013 at 4:19 AM

Ronald,
Your statements indicate you are missing the point with financial planning.

The first level is financial planning is Risk Management – preparation for the unexpected life events like accident, lawsuit, illness, divorce, or death.

It does no good to only save and then have everything wiped out by one of those unexpected life events.

The second step is Sufficiency – saving for expected life events like retirement, children’s education, future expenses, etc. You should be saving 15% to 25% of your gross income to prepare for the future. It is likely that a working life will be 40 years and the retirement period will be another 25 to 30 years. It will require savings of 15-20% to offset the impact of inflation, taxes of all types, new goods and services, wear and tear on existing goods, unexpected life events, and higher standards of living.

The presence of debt indicates one is living above their means. And it is difficult to accumulate assets while facing the headwinds of debt at 10% to 28% interest. The purpose of saving is not to become wealthy; it is to be prepared for opportunities that can make one wealthy.

Finally, the last step is Surplus – investing in high risk, opinion based assets like the stock market, business, and real estate. I use the term opinion-based because the value of the asset is based solely on the opinions of others and subject to change at a moment’s notice (Remember September 2008?)

Sir, based on your comments, I would advise meeting with a knowledgeable advisor who can give you sound advice. Otherwise, you may end up where you are headed.

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Ronald Dodge April 2, 2013 at 11:20 PM

First, as to your argument of risk, there is always going to be risks in life as that’s unavoidable. As such, you *MUST* learn how to manage those risks. By your first argument, you are basically claiming that you can pay all of your risks away, and I find that difficult to believe as some risks, you can’t just get rid of by paying for insurance. I been dealing with one of such risks for the last 23 months now, and that’s unemployment. Even though I have not landed on employment, I have not just been sitting around either. In these 23 months, I have earned 90.5 quarter credit hours (or two years’ worth, which University of Cincinnati switched from quarters to semester in August 2012, thus why the fractional) in just 15 months to get my BBA in Accounting, and I am about to have another 15 credit hours earned within my MS Accounting program before the end of this month.

To help with this risk, I was getting unemployment insurance (UI) (Note, this insurance only pays up to 60% of what one was making prior to the lay off (for us, its only 36% of what I was making prior to layoff), thus it only offset some costs, which in my case, it’s even less than that as it only takes earning about $9,000 per quarter for 5 quarters to max out the UI to get a weekly benefit of $415), though they claim I had voluntarily quit my TA job, which ended when I had graduated with my BBA in Accounting. My wife has also been working, though not enough to cover all of our necessary living expenses. These 2 sources of funds has been the main sources to help us make it through as I put myself through college (though I ultimately had to earn 7.5 years of college credits to get that 4 year degree, all within the same major, which I think is bogus as no one should have to earn 336.5 quarter credit hours to get a degree that only requires 180 quarter credit hours, which also ultimately cost me about $75,000 after taking into account of scholarships and grants to get that degree which includes $11,000 refund I was due but never saw as the first school went bankrupt, even with me filling out the paper work tied to the bankruptcy with the college, which I earned that ABA in Accounting by earning 93 quarter credit hours and 20 hours a week coop in the fourth and final quarter I was there which I earned 77 quarter credit hours within the first 3 quarters because of the fact about 80% of it was repeat from what I had at the vocational high school in my high school years). Even of the 90.5 quarter credit hours I earned at UC, about 60 of those hours were review/repeat for me, thus why I was able to get a GPA of 3.88 on a 4.0 scale while taking between 18 and 20 credit hours per term.

As to your so-called second step and last step, I combined them into one step. While one does have to build up some funds for an emergency fund, just saying one needs to save up something like $25,000 to put into just some money market fund that doesn’t even remotely keep up with inflation, that is no good for me. As far as I am concerned with that strategy, you automatically lose to the inflation risk. As such, after a certain amount of funds is built up (like between $1,000 and $2,000), transfer that over to the brokerage account, and then invest that into stocks. Let’s face it, most of your so-called emergency spendings are on long-term type spending, so why are you doing to use short-term funds for long-term spendings?

For me having been on unemployment for nearly 23 full months, my emergency fund has only dropped $1,000 give or take, and I have done very well with this management. If I would have went the route as stated by either those of life insurance companies or by Dave Ramsey, my emergency fund would have been dropped by at least $5,000. Yes, I take on a huge economic risk by employing the strategy I have, but at least, I am more likely to win than I am to lose with it vs. the strategy told to employ by people like Dave Ramsey, I would instantly lose to the inflation risk as those strategies don’t even remotely keep up with inflation.

When we do have sufficient income coming in, I have used the 25% of “Actual Earned Gross Income” rule that must go to “Countable Savings”, which there are only 3 categories to such countable savings, which are listed in preferred order:

Net Contributions into Retirement Funds
Net Debt Reduction
Net Contributions into Emergency Funds

Just cause I have them listed in a preferred order, it doesn’t mean I just dump everything into just one of the 3 categories. I use a mixed approach as I have to take into account of the set of circumstances and what could be coming up on the horizon, which I also use my cash flow management worksheet quite extensively to spot things much sooner. The other thing, because there are setbacks expected, I also implimented the rule, one need to save at least 40% of Actual Earned Gross Income during the good years, so as that additional 15% can help cover for the bad years, which I was very successful at doing during my good years, thus another reason why I have been able to slow the bleeding during these last 23 months.

I have been using a credit card for our regular expenses, but then I pay that card off every single month, so as to avoid the finance charges. Yes, we do have debt, but the only debts we have are student loans and a mortgage on the house, as far as long-term debts are concerned, which I have NOT fallen behind on the mortgage at all. The highest interest rate we have on our student loans is 6%, so we aren’t even close to that 10% to 20% range you talking about. As for the mortgage, that is at 4.99%. Not only have I been able to keep up with the payments, I have managed to drop the principle by more than $9,000 on it and got rid of the MIP/PMI on it even though I have been on unemployment during this same time frame.

Once I am in practice doing CPA work, then come having to get insurance on the profession, which that is not cheap, but then it’s expected regardless. That would be one such case to get insurance. As such, I am not against all insurance, just against senseless insurance, as it doesn’t make since to insure all risks (Some of which you just simply can’t get rid of). Just as you said about living within your own means, you must work within your own means, thus you must learn how to manage your risks.

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Daniel Banks February 14, 2011 at 8:02 AM

Thank you Neil, I appreciate the response. You have an excellent website which promotes a good service.

I wish you much success as well!!

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Neal February 14, 2011 at 7:52 AM

I agree Daniel, there is nothing wrong with making money selling a needed product. I also agree that there are some agents who do a fine job w/whole and universal life.

I also agree that you can’t discredit a product just by discrediting a segment of the people who sell it.

On Pilgrim, I have done my best to discuss why I think the product itself is not a good fit for many of the people who get it sold to them.

Thanks for your civil discourse and much success.

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Daniel Banks February 14, 2011 at 7:48 AM

I agree Neil, sometimes products are sold for the wrong reason, however I think it’s hypocritical to make the insurance agent the villian. This is often done by CFPs and it gives the consumer the idea that the “investment professionals” are barely compensated on the products they promote and sell, which you know is entirely untrue.

Permanent life insurance is a financial tool which has been in existence for a long long time. It has served people well for many different reasons, far too many to mention in this response.

I think it is irresponsible to argue against the merits of a product by discrediting the professionals that sell it. There are unscrupulous people who sell the combination of term insurance and high commision investments as well. Many consumers have been burned in the market and then woke up one day to find out that renewing a term policy is not as cheap as it was when they first bought it, and thats even if they qualify for the coverage. Many people take comfort in the fact that they can own a life policy which will provide them with options in the future.

If you can honestly say that you do not make any money selling insurance or investments, I will eat my words, but please don’t discredit other industry professionals just because you choose to give different advice.

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Neal@Wealth Pilgrim February 13, 2011 at 9:03 PM

Daniel, You make a logical argument but with all due respect, I believe there is one point you miss.

Yes….life insurance is great for the heirs….but is it worth it for the insured? Not always. If I no longer need it and I have better uses for the premium dollars, it’s a mistake to buy permanent life insurance.

Also, in theory, you do have a good argument but in practice, it doesn’t work. What happens in real life is that the wrong people are sold the wrong insurance for the wrong reasons.

People who should have more term to protect their family are sold smaller permanent insurance policies because that’s all they can afford. The reason? To line the pockets of the insurance agent.

I am sure you would not do this and I certainly don’t think every agent does. But over the years, I’ve seen it happen far too often and it’s the norm rather than the exception.

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Daniel Banks February 13, 2011 at 2:11 PM

As a life agent for 11 years I always have to laugh at this arguement when someone claims that agents make more selling whole life. I have sold plenty of term and whole life and the fact is that term commisions are often as much as 110% of the policy premium while whole life pays about 55-65%. Yes, it cost more initially, but what about folks in thier fifties and sixties who renew thier term policies?? Those premiums are pretty salty. How about the guarantee issue insurance seniors purchase in thier 60s and 70s because they want to pay final expenses? Ouch!!

Evan got it right, you can own both and are smart to do that so when the term expires, you at least have something. Forget buy term and invest, buy both and insurance will be one less thing you have to worry about in retirement. Last time I checked, the mortality rate is 100% which means that permanent policy will eventually pay out to your heirs.

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Ronald Dodge January 5, 2011 at 4:13 PM

I looked at the whole life aspect and every time I look at it, it never makes financial sense to me. Even for the estate tax issues, there’s other ways to resolve those issues than through whole life.

I also looked at term, some may make sense, but others don’t. The only thing is, when you are strapped for cash, you have to choose how you going to divert that money. While it’s true, you could end up dying or get killed within the next 1 hour, you have to also look at your risk factors and what’s the odds of you beating it and how to best invest that money. There isn’t no one answer to this question as you have too many people on both sides of the extremes on this very topic.

The one thing I have always hated about life insurance companies is the fact they use stories like the one of some family bought the insurance and the very next day, the breadwinner was killed, which then the rest of the family got the insurance money. Unless it was due to some illegal act by one or more of the beneficiaries, then obviously, the family don’t get the money. Outside of that, what’s the odds of a such situation really happening? But yet, they use such stories to play on people’s emotions, so as to get people to buy such insurance policies. That’s been a major turn off for me as it’s saying they are attempting to instill fear into people. For me, life has a lot to do of how do you manage risks. There is no such thing as 100% guarantee in life, but you also need to learn how to manage such risks to the best you can.

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Neal January 5, 2011 at 1:35 PM

Good point. This is what they sell you on but I don’t buy it. YES….buy the whole life if you know you’ll need it for your entire life. But if you know you won’t need it, who cares if your health is poor…and as you say…it’s unpredictable.

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Don March 10, 2013 at 4:33 AM

Neal,
My only question is, “What crystal ball are you now using to know whether or not you will need life insurance in the future?”

I’m a financial adviser and I would like to use this for my clients.

Most of the 20 – 30 year olds that I meet are certain about things, as I was at that age. However, most of the 40 – 50 – 60 year old people I meet wish they had done things differently, life buying life insurance when it was cheap and easy to get. Because things have not worked out as they planned.

I can’t tell you what the future holds for you, but I’m pretty sure it will not be what you think today.

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Neal Frankle March 10, 2013 at 11:12 AM

You are correct that nobody has a crystal ball. But that’s not a reason to make a very bad investment. Is the logic to buy something that has no value because things “MIGHT” change and it MIGHT have some value down the road?

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Mike Manginelli March 27, 2013 at 8:21 AM

Neal,

After reading the article and both sides of the argument I have a few things to point out. First and foremost, any type of insurance would not be needed if we, as people, were all capable of making sound financial decisions. Let’s say everyone made the proper budget, good savings habits, the proper retirement plan, the proper college savings strategies etc. Would insurance be something that we would need to purchase? No. If we had enough money in the bank to dish out everytime we got into a car accident, car insurance would not be needed. If we saved enough throughout our lifetime to leave to our families or heirs, life insurance would not be needed either. The fact is, we live in a world where we need a safety net and guidance. The best athletes have 4-5 trainers, coaches, and other athletes to help them and guide them to become a better athlete. Warren Buffett even has a team of advisers that he frequnetly meets with when discussing his own investment objectives. Why does someone who has a net worth of 62 billion purchase long term care insurance? He said insurance is about passing on the bulk of the financial risk.

You mentioned that at certain milestones people won’t need life insurance. When exactly is that date? If we knew we would die in the next five years and didn’t have sufficient assets or savings to support our family, would we purchase life insurance? Absolutely. The point isn’t about if we will need it, the point is when. We can’t predict the future, so letting the insurance company assume our risk at a lower cost makes sense. I think you agree on that based on what you said about insurance as a whole.

What I disagree with is the only need for whole life insurance. It does a great job for estate planning purposes, but it is a great tool for other people as well. Like you said it is definitely not for everyone. I agree that bad products are sold by bad advisers. Isn’t that in any industry though? Aren’t there bad police officers committing crimes? Aren’t there corrupt politicians and lawyers out there doing an injustice to the public? However, if you called all police officers bad, you will get the majority of them who risk their lives everyday on the frontline arguing that case. So when you say the advisers who “sell” whole life insurance are looking out for their own best interest, and looking to receive the highest commissions that is 100% false regarding the role of moral advisers.

Knowing when to use whole life insurance is the key to its success. In the early years, younger people or families can “”lock-in” their insurability at a low cost for the rest of their life, especially those in good health. If that same person purchased TERM, locking in a good rating, in 20-30 years that cost at renewal sky-rockets, sometimes making it too costly to purchase. This, in my opinion, is worse than selling an expensive whole life policy because at least there is coverage in place as a safety net for their families.

If people have no heirs, no one dependant on their future income, or just flat out don’t care to help when they pass then whole life insurance is not for them. Or if people have medical/health issues and do not currently have money saved whole life insurance is a poor choice for them as well.

Also, whole life insurance as an investment is never the only investment one should have in their entire portfolio. As you know, diversification is essential. So if people do take a huge loss again in a down market, they have some guarantees that allow their portfolio to remain balanced. This is why people have fixed and variable investments in a well-organized portfolio.

For estate planning, whole life insurance is not only good for tax planning, it is also a great tool to allow for a gauranteed cash benefit to his/her heirs while giving them a “permission slip” to sell down their other assets. If a person has a 401k plan for retirement or a pension through their employer, a whole life isurance policy can allow them to take maximum distributions, knowing they will be able to still provide their succeeding generations.

The truth is whole life insurance is a benefit to the living as much as it is to the beneficiaries.

Term insurance cannot do these things unless you are sure you are going to renew at a later, higher premium. Primerica coined the term “buy term and invest the difference.” However, like I mentioned before, we are a unique type of people. We can easily do things on our own, but sometimes we need that extra push, or guidance that will enable us to act. Whole life insurance for the mere purpose of a “forced savings plan” allows the policy holder to have the safety net, with a fixed rate of return. This usually will not surpass the returns of a stock market, but once again it is allowing the insurance company to assume risk while we worry about all the other aspects of our daily lives.

As an adviser, it is our job to make sure given hell or high water that any life changing event will not effect our portfolio dramatically. Becoming ill/sick, being injured, getting sued, losing their job or a death in the family all need to be factored in so that at any point in the future, the family will never have to trade in their safety net or “surrender” their policy to take care of these other life-changing events. Any insurance agent or adviser needs to manage their clients entirely and not act like a salesman and whole life insurance will be used properly.

I appreciate your articles and I thank you for allowing me to respond to your opinions.

Mike

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Neal Frankle March 27, 2013 at 8:37 AM

Thanks for your well thought out comments. I stand by my arguments which I won’t repeat here.

a. There is absolutely a time when some or most people don’t need any insurance anymore.
b. There is absolutely no need for whole life insurance unless you have an estate tax problem.

Thanks,
Neal

Ronald Dodge April 2, 2013 at 10:05 PM

I too am not into using whole life insurance for any reason other than potentially for tax planning purposes (that would only be if all other tax vehicles has been maxed out)

One, my grandmother paid into a whole life insurance for decades only for her to come down with Alzhiemer’s Disease. After that, it had lapsed and we never saw one red cent of it, so what was the point of paying into it if they don’t have to pay it out due to it lapsing as a result of a long-term terminal illness that kills out the mental capacity of the person, which my grandmother had the illness for 15 years (the average life expectancy of the illness is 7 years)?

Another, while I hear about the risk argument (and yes, it is valid to a point), even with that taken into account, I still find it very hard press to go with a whole life insurance policy. As a matter of fact, I tend to go without insurance as much as reasonably possible because of the simple fact, what you pay into it, you don’t get out of it in the long-run. As such, I would rather just dump those premiums into a savings vehicle instead.

As to your argument about not needing insurance for anything if proper budgeting was done, in general, I agree. However, there is one aspect I do disagree with it, but there may be no good answer for this one particular situation as the person would normally be cause in between a rock and a hard place in such a situation. Think about a person who is starting out in life with very little money and what if something happens to that person?

In my case, I became epileptic and learning disabled at the age of 10 months old via a high fever of 102 and a right ear ache. Ultimately, I also ended up being in the foster care system (my third strike), which then led to the adults treating me like I wouldn’t make it in life, which then realistically gave the older bigger kids the green light to beat the living tar out of me only for the school officials to tell me to ignore it or they didn’t want to hear it. As such, I essentially had to become emotionless on grounds of both, to not allow the other kids to see how I felt because if I did, the beatings only got worse, and I also had to keep every single stress level within normal range else I went right into a seizure by the time I was a teenager.

When I had fought back to defend my own self, I was the one punished by the school officials only to be punished further by my guardians as they sided with the school officials. It didn’t even matter what type of area I lifed in, it was all the same.

You see, I was on Child SSDI until I was eventually kicked off of it via the money I had earned while in college the first time around with the College Work Study program that was granted to me via my financial aid. I think it’s sickening to think college financial aid would get you kicked off of social security disability income, but that’s exactly what happened to me. however, even with that, the insurance was what paid for most of my medical expenses and my living expenses including the 2 phases of testing and the laser brain operation I had performed to get rid of them seizures permanently. Without such insurance to help me get started in life, I would not have been able to get that and be able to get on my own two feet. Not only that, I probably would have died from them seizures as they kill off brain cells that doesn’t grow back, which then a person gradually dies from a such medical issue as that.

For these reasons, I do believe insurance does have a place, but only to a point as these days, I see insurance being pushed off to cover so much stuff, and yet, you can’t just sell away your risks such as you can pay off your risk of falling ill or dying. As such, you must learn how to manage your risks as getting insurance for many of such things is not the answer. Whole life insurance is one such insurance I won’t get unless it’s specifically for a tax reason, but even then, very unlikely to go that way.

As for the savings argument, I am with Frank Neal. I don’t see the point of paying so much into life insurance to get very little out of it as far as the cash value is concerned given the various regulations that’s involved, especially after what happened with the case of my grandmother. Yes, I am currently a licensed life insurance agent, though I am in college to become a CPA to go with my Information Systems work, and plan on taking the CPA exams this summer.

krantcents January 5, 2011 at 1:21 PM

Thanks for the explanation. I was under the impression that another reason to buy whole life is health. If the insured could be in poor health some time in the future, it would be important to have a whole life policy. I don’t know how to predict it though.

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Neal@Wealth Pilgrim January 5, 2011 at 10:13 AM

Evan…thanks…

You make a good point. I suppose it is a forced savings and if the alternative is spending the money…..maybe it’s a better deal but I’ve seen so many clients get absolutely NOTHING back after paying into a whole life for decades….

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Evan January 5, 2011 at 8:31 AM

How many people that don’t have a fantastic advisor like you ever invest the difference? How would one even know what the difference is if a whole life illustration is never created?

FULL DISCLOSURE: I have both types of insurance.

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Neal Frankle, CFP ® December 14, 2013 at 1:50 PM

Evan – good point. However, if I was this person’s agent, I would have suggested that she buy more term as each child was born. I definitely believe in the laddered approach. That would have alleviated the problem. I know you aren’t the pushy guy Evan. Sorry if I implied it. :)

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