Is whole life insurance worth it?

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By Dr. James M. Dahle, Founder of WCI

Whole life insurance is a lifelong life insurance policy that gradually builds up a cash value that can be accessed by surrendering the policy or borrowing from the insurance company on predefined terms with the cash value as collateral. As a rule, it is a product intended to be sold and not bought. It’s rarely the best way to use someone’s extra cash, even if it’s a doctor. So the short answer to whether whole life insurance is worth the premiums you pay should be, “No, it’s not.”

However, given the persuasiveness of those who sell whole life insurance, it’s important to understand the reasoning behind that “no, it’s not worth it” answer. Let’s get into the long answer.

Whole life insurance is designed to be sold

What do I mean by a “product designed to be sold?” Well, once people understand how a whole life insurance policy works and how it performs against alternatives for various financial tasks, very few people actually want whole life insurance. They simply use the money to buy better financial products, regardless of their financial needs or desires. For example, here are some of the potential uses of a whole life insurance product and what is generally a better alternative (you can click to enlarge):

Alternatives to whole life insurance

If whole life insurance is rarely the best product for a given need, why is it purchased so often? There are two main reasons, and both have to do with the sellers of the product. The more cynical among us consider the first reason to be the most important, but I think the second has more to do with it:

  1. Whole life insurance pays very high commissions and people do what they are told to do.
  2. Agents don’t understand the chart above because most of their financial education has been provided by the insurance company they work for.

Whole life commissions are 50% to 110% of the first year’s premium. If you buy a policy from an agent who has premiums of $40,000 a year, that agent was paid between $20,000 and $40,000 to sell it to you. Now you know why they were selling you so hard. You don’t need to sell a lot per month to have a great life.

Someone surely loves whole life insurance, right?

If someone really understands how a whole life insurance policy works and they still want it, I tell them more power. Buy as many fonts as your heart desires and your wallet can afford. I have no problem with someone buying a whole life insurance policy that they really understand and really want. While whole life has its pros and cons, there are a handful of reasonable and appropriate uses for a whole life insurance policy. They are rare, but they certainly exist. Let’s go through seven case studies just to demonstrate.

Case study #1

John really wants a guaranteed death benefit to fund a specific need when he dies. He wants to endow a chair at his faculty of medicine. It costs $1 million right now, but the price goes up every year. He wants to make sure he can do it whether he dies next year or 30 years from now. He therefore values ​​the security offered by a permanent life insurance policy, even if it means that, on average, he is likely to leave less money for the school. He was considering a guaranteed universal life insurance policy. In the end, he opted for whole life insurance instead, because the guaranteed death benefit increases a little each year, as does the cost of staffing a chair.

Case study #2

Sally hates the government and she hates the banks. For some reason, insurance companies are excluded from his institutional hate list. She frequently purchases real estate properties and would like to have a ready source of funds with predefined terms that can be reached within a week or two without any underwriting hassles. She doesn’t mind that she gets a negative return on these funds for the first few years, because she feels the higher long-term returns on her money will make up for it. She buys a well-designed whole life insurance policy to apply the “Bank on Yourself/Infinite Banking” technique with freed-up additions and indirect recognition.

Case Study #3

Jacque and Talifa are partners in a successful business. Although they are both still in good health, they plan to run this business well into their 70s or 80s. However, if either of them were to croak, they wouldn’t want to be forced to run the business with the other’s heirs. So they decided to ask the company to take out a whole life insurance policy on each of them for about half the value of the company. When one of them dies, the remaining partner now has the money to redeem the heirs of the deceased partner according to the buy/sell agreement. To save money, they can even just purchase a single “first to die” policy for this need.

Case study #4

Bobby Jo owns a large farm and is in good health. She really wants to keep it intact when she dies, but it’s 95% of her net worth and she has four kids. She wants them all to have an equal inheritance, but only one of them is interested in the farm and she doesn’t want it to be divided, anyway. This child has money and can afford to take out a mortgage for part of the farm, but cannot afford to buy the whole thing for his siblings. So, Bobby Jo decides to take some of the large farm income and use it to buy a whole life insurance policy. This policy will provide most of the cash inheritance for the other three siblings, and the child holding the farm can cover the rest.

worthwhile whole life insurance

Case Study #5

Rodrigo stays awake at night, fearing he will lose everything he worked so hard for. He is in a high-risk medical specialty and has already been named six times in his career, settled a lawsuit, then lost one in court with a payout slightly above policy limits. One of the city’s personal injury attorneys really wants it. But he loves his practice and wants and must continue to practice. He lives in a state that doesn’t offer many asset protection benefits, but fully protects retirement accounts and whole life insurance from creditors in the event of bankruptcy. He already maximizes retirement accounts (including Backdoor Roth IRAs every year) and has already made several big Roth conversions. He plans to form a trust overseas, but instead decides to put money into a whole life insurance policy. He knows the returns won’t be as high as simply investing the money in tax, but he finds the benefit of asset protection very valuable.

Case Study #6

Bella has been very successful and has an estate tax problem. She decided to form an irrevocable trust to provide for her adult children upon her death and to try to minimize the estate tax bill. She considered placing stocks, bonds and real estate in the trust, which could maximize the return (and the amount of money she is likely to pass on to the children). Instead, she finds the guarantee of a large amount in the trust should she die prematurely combined with the hassle-free, tax-free nature of having one large whole life insurance policy in the trust to be attractive.

Case Study #7

Carinda and Pablo have a disabled adult child. They are far from financially independent, despite being in their early 60s. They expect to work at least until they are 70, and they are terrified that their child will be thrown into poverty when they die. Supporting themselves is their most important financial goal, even if it means they will live mainly on social security and a small pension in their later years. They have opened an ABLE account, but it won’t be big enough to really meet the needs. So they bought a 10 premium, second-to-die whole life insurance policy, and they will retire as soon as they have paid the 10 annual premiums, knowing that the proceeds of this policy, paid into a trust, will be provide for their child’s needs.

Conclusion: Is Whole Life Insurance Worth It?

Hopefully this shows some of the situations where a whole life policy can make sense. Note that none of them are medical students or residents. None are youth participants with student loans and practice loans. In each case, the buyer understands how the policy works and what trade-offs they are giving up in exchange for the benefits they want.

When they don’t, you’re much more likely to see doctors regret buying whole life insurance and even feel like they’ve fallen for the “whole life scam.” “. Seventy-five percent of investors in white coats who have purchased a whole life policy (including me) regret their decision, and the Society of Actuaries has found that approximately 80% of whole life policies are redeemed before the death. Don’t be part of the majority of buyers. Buying a policy is like getting married. It’s either “until death do you part” or the breakup is going to be very expensive. Do the same degree of due diligence in buying that you would take to get married.

Whole life insurance has many niche uses, but for most financial needs there is a much better financial product. Simply saying “no” and walking through the door is unlikely to result in regret. Whole life insurance is grossly oversold by ignorant insurance agents facing a massive conflict of interest. Although I’m well known for being “whole life anti-life”, I have less of an issue with the policies themselves (although most seem designed to maximize commission rather than desired benefit) and more with how and the frequency with which they are sold.

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What do you think? Do you have a whole life insurance policy? Do you regret it? Why did you buy it? Comments below!

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