How To Avoid The Salesman's Hype And Focus On What's Best For You
- Why life insurance is a negative expectancy bet for the majority of consumers
- The problem with mixing investing with life insurance
- 4 concerns you should have about whole life insurance
- 7 basic terms and features of whole life insurance you need to know
- Why you may not benefit from compound interest with whole life insurance
- The hidden consequences behind tax-free whole life insurance loans
- 4 common, persuasive arguments from whole life salesmen and why they're wrong
What’s the most popular type of life insurance sold in the U.S.?
If you guessed term life insurance, you’d be wrong.
Despite the well-established conventional wisdom that you should “buy term and invest the difference,” the reality is whole life insurance sells the doors off term. The numbers aren’t even close.
According to the American Council of Life Insurers (ACLI), in 2014, 63.7% of all individual policies sold in the U.S. were whole life, compared to just 36.3% of policies being some type of term coverage.
This fact is even more disturbing because you’d be hard-pressed to find anything positive written about whole life insurance unless you happen to prowl insurance agent or insurance company sites that profit from selling that type of policy to you.
And yet 63.7% of all policies sold are whole life. Amazing!
This article will give you a deep understanding of whole life insurance – its benefits, pros & cons, tax treatment, and use for retirement income – so that you can decide for yourself what best fits your situation.
You’ll get everything you need to combat the insurance salesman’s hype so you can make a smart decision, independent of their influence, as to which type of life insurance is best for you.
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Is Whole Life Insurance the Best Type of Life Insurance for Estate Planning?
Another misconception is that whole life is a good financial vehicle for estate planning. As discussed in the previous section, if permanent insurance is needed, the best value in coverage is guaranteed universal life.
When Does Whole Life Make Sense?
It should be clear by now that for 99% of individuals, whole life insurance does not make sense.
However, there is a rare combination of circumstances where whole life insurance might work:
- The policyholder needs permanent life insurance protection,
- Is extremely wealthy and has exceeded the contribution limits of competing tax-advantaged investment plans such as the 401K, IRA, HSA, or for the self-employed, a Solo 401K or SEP,
- Can easily afford the planned premiums,
- Is not concerned with rate of return…
- …and values the less tangible benefits from the policy such as asset protection, or for businesses, higher employee retention, or simpler (or more cost effective) administration of defined benefit plans.
Remember, I didn't say whole life insurance is always a bad deal. It's not. There are always exceptions, and those exceptions are best illustrated by clients placing a high value on the ancillary benefits provided by the policies (not the straight investment return or life insurance itself).
In a recent report conducted by The Newport Group titled “Executive Benefits: A Survey of Current Trends,” the group determined that within businesses with $1 billion or more of revenue, permanent life insurance (often whole life) is used to fund 82% of supplemental executive retirement plans and 73% of Non-Qualified Deferred Compensation plans.
Businesses use cash value life insurance to fund their executive retirement plans not for rate of return or liquidity, but for completely different reasons that are beyond the scope of this article. I’ll mention them in passing, just to illustrate:
- They set up a “split dollar” plan providing some death benefit protection to the business as long as the employee or key executive works for the business.
- Employee retention benefit.
- In some cases, businesses find it's cheaper, or they run into fewer ERISA compliance issues, when life insurance is the funding vehicle.
In other words, the motivation for the purchase is an ancillary benefit of the policy other than the expectancy of the investment. This is a key point.
Another example of this type of motivation is when a wealthy individual chooses to fund a whole life insurance policy with large amounts of premium for asset protection reasons.
Historically, creditors and plaintiffs have had a difficult time attacking life insurance cash values, since the purpose of that money is to pay for life insurance expenses.
Notice how the motivating reason is not the expected return of the investment. It’s the legislated value of ancillary benefits, by law, that motivate the purchase.
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Okay. I’ve covered a lot of territory in this article. Now it’s time for all the insurance agents to jump in and rebut everything stated and prove what a great deal their insurance products are for consumers.
Readers should understand they are salesmen for a reason. They make their living by being persuasive, and I fully expect amazingly persuasive comments showing how most of what I said is nonsense and I don't understand the business and made egregious errors and don't have any clue what I'm talking about.
So let’s prepare the normal (not a life insurance geek) reader for the usual types of persuasive arguments used to refute everything written here so that you’re well-armed to deal with the onslaught:
- The Circumstantial Argument – They’ll cite examples where they personally, or maybe their clients, got a great return on their whole life policy. Yep, it’s entirely possible. There are always exceptions. However, that doesn’t change the general principle that it’s not right for the majority of middle to high income individuals.
- The “Properly Structured” Argument – These arguments consist of various statements about whole life only working if it’s set up properly. For example, you must have the right agent using the right policy from the right company. Or if you structure it for maximum cash accumulation, or direct more premiums to paid up additions, or buy this or that rider, or pay up your policy over 10 or 15 years instead of over your whole life, or if you take your cash as a life-only SPIA how much more money you’ll end up with, etc. While I agree some agents will set up whole life policies for better success than others, and that some companies offer products superior to others, these don’t change the irrefutable facts. Regardless of what you do, you’ll still have the problem of forced contributions, limited liquidity, and a policy that usually won’t break even for 10 years. Will careful structuring help? Of course. Does the fact that careful structuring is necessary for it to work prove the issue about unnecessary complication raised in this article? You betcha! Does it prove my point that the devil is in the details to calculate the expectancy of the contract? Absolutely yes!
- The “Better Than Nothing” Argument – Agents defend selling whole life insurance because even if whole life isn’t the perfect investment, it’s better than nothing, and people would be better off investing in this “forced savings plan” than doing nothing at all. Yep, I absolutely agree that it’s better to pay premiums into a whole life policy than spend your money on lattes, but to be fair, when analyzing any investment opportunity, the deciding factor usually isn’t whether or not you get a better return from the proposed investment vs. pissing your money away. The real question that must be addressed is whether the investment outperforms competing investments. Lattes aren’t an investment. Anything is better than nothing, but that’s not saying much.
- The “Burned by Term” Argument – They’ll cite examples where people got burned by buying term instead, and down the road, after their level premium period expired, they still needed coverage, but couldn’t afford to buy permanent coverage in their old age. They’ll argue that people should lock in their permanent rates when they can (the younger, the better). Yep, that's true also. But they knew that fully disclosed risk when they bought term. It's not a case for whole life, but it could be argued in favor of guaranteed universal life.
Realize also that many agents love whole life, not only because they make great commissions from selling it, but because some agents really do believe in it.
Just take what they say with caution. See if you can uncover all the details and complication well enough to develop a full understanding about the investment expectancy of the policy. It's not likely.
Note to Agents: My only request with all the expected critiques is you please be respectful to my audience by focusing on facts and providing information that expands the knowledge base.
The lesson learned from analyzing whole life insurance is pretty straightforward and can be extrapolated as a general principle to other “Swiss Army Knife” investments like variable annuities as well.
Complicated investments are usually complicated for a reason. When the insurance actuaries mix life insurance with a savings account with guaranteed income and throw in tax benefits and borrowing all into one wrapper, even the experts can get confused.
The facts and numbers can be twisted in many different ways. Just trust one thing: life insurance actuaries aren’t dumb.
They design and price this stuff for a living, and they represent the opposite side of the deal from where you stand. The goal is insurance company profit, pure and simple.
And the only way they can profit is to construct a package that sounds desirable enough to the consumer to motivate him to hand over his money, yet price it in a way so that the insurance company and the agent selling it get paid.
Stated simply, it must be a positive expectancy bet for the insurance company and negative expectancy bet for the buyer (on average), otherwise it won’t be profitable to the company.
That’s not to say all life insurance is bad. Quite the opposite is true, as long as you use life insurance to insure those risks you can’t afford to take.
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In other words, the general rule is to use insurance as a risk transfer tool. That’s what it was originally designed for before slick salesmen and actuaries figured out how to redesign it as investment packages with tax benefits and complicated rules to broaden the sales appeal.
The undeniable truth is that it’s extraordinarily difficult for consumers to separate out all the costs and figure out what benefits they really need versus what they’re paying for.
These complicated investment products sell well because the pitch includes a smorgasbord of benefits all wrapped into one investment product, albeit at a cost.
They sound appealing because you get so many things that no other investment provides – guarantees, tax benefits, asset protection, and even a little life insurance thrown in for good measure. Few consumers have the time or financial savvy to dig deep enough to figure it all out.
Slick salesman use advanced persuasion techniques like the framing tools mentioned above (and likely used in the comments below) to organize arguments that sound undeniably true to promote their policies (read “contracts”), while simultaneously failing to disclose the multitudes of rules and complication that must be fully understood to really know the investment expectancy of the product.
Related: 5 Financial Planning Mistakes That Cost You Big-Time (and what to do instead!) Explained in 5 Free Video Lessons
If you’re one of the unfortunate people who was sold a bill of goods by one of the big name life insurance company agents and it hasn't measure up to expectations, then consider cutting your losses by using your cash value to fund a guaranteed universal life policy instead, or by cashing in your insurance and buying term instead.
It costs you nothing to get your quote here and examine the numbers, and it might just save you a bundle. There's no risk to inquire and learn more.
The following video and PDF guide show you how quick and easy it is to get a no-cost, no-obligation quote so you know exactly what to expect.
I hope this information on whole life insurance has helped you understand the issues at a deeper level so you aren’t easily swayed by the narrow framing arguments commonly provided.
This is business, and like most business decisions, it’s really common sense when you get right down to it.
Complication is generally used to obfuscate the facts and distract the consumer from the obvious truth. For that reason, be wary of complication.
If you can’t fully understand it, then don’t invest in it.
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