Whole Life Insurance

[William Sparrow]

Apologies if this has been addressed elsewhere.

My financial advisor is pushing pretty hard to have me purchase a whole life insurance policy. His stance is that it will accumulate value over time which I can use to invest in other business opportunities later in life tax deferred, supplement retirement income, pay off estate taxes after my death, pay for long term care if I need it later in life, etc. He also feels it is a good way to mitigate tax burden.

I've always been told that whole life insurance is a scam unless you have dependents that you anticipate will need care after you're gone which is not the case with me. I currently have term life policies that will end when I'm in my 60's. I also understand that the advisor probably makes a hefty commission off selling these to people and therefore is incentivized to sell it to me as opposed to it truly being in my financial best interests.

Opinions online seemed mixed, but I have found some resources stating it can be beneficial for "high income" earners as most of us pain docs are. Anyone have any strong opinions on this? Any resources going deeper into pros/cons? Thanks all

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[kstarm]

There are better financial investment options in my opinion. I would specifically ask what your FA will get in commission if you go whole life. If he is willing to forego the commission (unlikely, but if you are already paying an AUM fee +Retainer you might be able to use that as leverage) you could run the numbers and see. All of those things you mentioned you want to do with whole life you can do with other investments too without the hassle, money is fungible.

This goes over some pros and cons: The 9 Pros and 7 Cons of Whole Life Insurance | White Coat Investor

 

[DOctorJay]

it's more for the really high wealth people looking for estate planning shelters

Why Whole Life Insurance Is a Bad Investment | White Coat Investor

This popular post explains what whole life insurance is and the various methods salesmen use to sell it to you (usually inappropriately). Be forearmed!

www.whitecoatinvestor.com

Why is Whole Life Insurance a Bad Choice?

In this post, we go over the key disadvantages of whole life insurance so you can decide whether or not whole life insurance policy is for you.

www.physicianonfire.com

MMM 83: Whole Life Insurance for Physicians - The Physician Philosopher

Odds are you have been pitched Whole Life Insurance and have no idea if it's a good idea or a bad idea. Since it is so common for a physician to get this pitch, we thought it would be good topic to discuss on the podcast so we could help you through what Whole Life Insurance even is, where the...

thephysicianphilosopher.com

https://moneymeetsmedicine.com/whole-life-insurance/

 

[cowboydoc]

Run, don’t walk away from this planner unless you have >$10M net worth. I’m in the middle of unraveling a mess with this. $3M policy is costing $3500/year and the “investment” of the rest has earned ~2% the last 3 years. You read that right, less than inflation, half the return of my HYSA.

Your planner will do well with the policy. The company will do well with the policy. You will almost certainly would do better getting term life for insurance needs and investing the rest elsewhere. Forget the “tax advantage,” that’s like working part-time to pay less in income tax.

Don’t mix insurance and investments!

Edit: I was confusing some policies. This one is $4500/yr for $1.7 M

 

[SSdoc33]

Run, don’t walk away from this planner unless you have >$10M net worth. I’m in the middle of unraveling a mess with this. $3M policy is costing $3500/year and the “investment” of the rest has earned ~2% the last 3 years. You read that right, less than inflation, half the return of my HYSA.

Your planner will do well with the policy. The company will do well with the policy. You will almost certainly would do better getting term life for insurance needs and investing the rest elsewhere. Forget the “tax advantage,” that’s like working part-time to pay less in income tax.

Don’t mix insurance and investments!

so, there are some tax advantages to whole-life policies. and it can give you a lot more flexibility with estate planning, etc. but as an investment, it doesnt track with index funds.

also, the returns on the policy are not guaranteed, so when you sign up for a policy, and they show you a table that when you are 65, the policy will be worth X amount, that amount is based on a rate of return that is variable. that rate has actually gone down in the last several years, so they final product will be lower than what you think you are going to get.

that being said, if you are just starting out your career, and plan to do this for a while, you may have several million $$$ to worry about by the time you hit retirement. think about what you may be doing at that point in your life (sitting on a beach, investing in real estate, taking care of a special-needs child). whole life policies have been around forever and they are very safe. if they were such an awful investment for everyone, they wouldnt exist.

yes, your financial planner will get a piece of the pie. doesnt necessarily mean that it is wrong for you.

 

[mdo1738]

Whole life is trash, as is your financial advisor.

 

[gdub25]

I would argue against the "while life is trash" and say that kind of outlook is trash. As mentioned above, if your net worth is 10mil + then it probably makes sense. I was the guys who said "yeah, I'm gonna hustle and get a better worth over 10 mil so sign me up for the whole life please".

Meanwhile, taking the mdo1738 approach, you're limiting what you're capable of by already admitting defeat in your earning potential.

The "as if" principle is real. Act as if you have a certain quality or capability and it will inevitably become so. I set up my financial investments as if I were going to make a lot of money, planned my business to make a lot of money, and I'm currently on track to...make a lot of money.

 

[epidural man]

My financial planner - who has a fiduciary responsibility to me (unlike people selling insurance), said the only time to by whole - life is if you win the lottery and need some tax sheltering.

It is a horrible life insurance policy, and a poor investment.

 

[Ferrismonk]

I used to sell insurance. Whole life has a *possible* upside if you're ridiculously wealthy. 99.9% of the time it's trash.

I would only recommend whole life/universal life/etc for those who don't have the discipline to actually invest in a normal investment and leave it alone.

Be sure you recognize the "or" part of receiving the cash benefit OR the face value if you die. Its a complete rip off.

 

[mdo1738]

I find the benefits of whole life for the super wealthy to not be particularly beneficial. My net worth will comfortably be 2-3 multiples of 10 mil and I don’t see the value in it. Your heirs get tax free cash quickly upon your death? There’s plenty of ways that they can still get cash without sacrificing years of god awful returns (whole life generally doesn’t even keep up with inflation). You can pay estate taxes with the whole life payout and not have to quickly fire-sale property just to pay the taxes? Plenty of ways to plan your estate and coordinate your trust to minimize all that.

Whole life seems like an inefficient and lazy way to get your heirs quick cash when you die. You can earn way more money than that if you invest it in literally any other financial instrument. I would rather be taxed on 7-10% ROI than tax free 3%. You can set up your finances to have tax free money waiting for them; I should never have to touch any of my Roth accounts, depending on how long I live and assuming a rate of 7%, I’m leaving between $7-13 million tax free behind.

Maybe I’m missing something, and I would be very interested to know what benefit you see in it for high earners, because I know you are very smart and successful and I respect your opinion Gdub so if I’m screwing up financially I would love to know so that I can rectify that, but I just don’t see any benefit to it.

 

[DOctorJay]

so, there are some tax advantages to whole-life policies. and it can give you a lot more flexibility with estate planning, etc. but as an investment, it doesnt track with index funds.

also, the returns on the policy are not guaranteed, so when you sign up for a policy, and they show you a table that when you are 65, the policy will be worth X amount, that amount is based on a rate of return that is variable. that rate has actually gone down in the last several years, so they final product will be lower than what you think you are going to get.

that being said, if you are just starting out your career, and plan to do this for a while, you may have several million $$$ to worry about by the time you hit retirement. think about what you may be doing at that point in your life (sitting on a beach, investing in real estate, taking care of a special-needs child). whole life policies have been around forever and they are very safe. if they were such an awful investment for everyone, they wouldnt exist.

yes, your financial planner will get a piece of the pie. doesnt necessarily mean that it is wrong for you.

Several million isn’t enough to worry about with estate taxes. Avoid whole life unless you think you’re going to have an estate tax problem.

 

[gdub25]

I think my point was more about drawing attention to it having a role and not being the worst thing of all time. I do agree that for the vast majority it doesn't make sense. I also agree that the brokers make high fees to sell it and that's the major reason many of us end up with it.

I actually don't advocate for whole life insurance. What I do advocate for is setting things in place for self motivation like the "as if" principle I mentioned above. Can you make just as good mathematical returns with investments that are taxed as income? Sure. But making investment moves early in your career as if your a high net worth individual can pay big dividends in terms of what you actually achieve in your lifetime.

As another example, my corporate structuring and LLCs are fairly complicated and I was gently teased by financial advisors and accountant when I was first starting out. They said "don't overthink things, you don't need this kind of complexity unless you worth 100mil". I told them that was the goal so let's go ahead and get prepared. Of course I'll fall short of such lofty goals but even falling short of goals like that leave me in a pretty good position financially.

 

[Ferrismonk]

I find the benefits of whole life for the super wealthy to not be particularly beneficial. My net worth will comfortably be 2-3 multiples of 10 mil and I don’t see the value in it. Your heirs get tax free cash quickly upon your death? There’s plenty of ways that they can still get cash without sacrificing years of god awful returns (whole life generally doesn’t even keep up with inflation). You can pay estate taxes with the whole life payout and not have to quickly fire-sale property just to pay the taxes? Plenty of ways to plan your estate and coordinate your trust to minimize all that.

Whole life seems like an inefficient and lazy way to get your heirs quick cash when you die. You can earn way more money than that if you invest it in literally any other financial instrument. I would rather be taxed on 7-10% ROI than tax free 3%. You can set up your finances to have tax free money waiting for them; I should never have to touch any of my Roth accounts, depending on how long I live and assuming a rate of 7%, I’m leaving between $7-13 million tax free behind.

Maybe I’m missing something, and I would be very interested to know what benefit you see in it for high earners, because I know you are very smart and successful and I respect your opinion Gdub so if I’m screwing up financially I would love to know so that I can rectify that, but I just don’t see any benefit to it.

You are right. The ONLY thing I would mention is that life insurance avoids probate so it can be helpful depending on who your estate beneficiaries are.

 

[SSdoc33]

also, not a bad idea to have whole life policy, but not a HUGE one. 5-10k/year offers you both life ins coverage and some financial flexibility.

 

[cowboydoc]

At what cost? In what situations would this be superior to having a term policy and putting the remainder of the money in an index fund.

Like most insurance, the company is profiting off our fear. We over-insure for unlikely events. I’m quite guilty of this, as I’ve always been risk averse (financially, at least).

 

[Baron Samedi]

You are right. The ONLY thing I would mention is that life insurance avoids probate so it can be helpful depending on who your estate beneficiaries are.

Doesn't a trust also avoid the probate issue?

 

[Ducttape]

estate planning with setting up a trust is the way to go.

 

[nvrsumr]

I think there is the a good chance estate tax exemption gets increased this year.

 

[bubaghanush]

I mean no offense, but if you are asking here about whole life you don't know enough about it yet.

Read some suggestions above, or get a fee-only financial advisor and pay them 400/hr for 8 hours work once a year. This will save you tremendously vs paying AUM or commission advisors.

 

[epidural man]

If you have millions of dollars, why do you even need life insurance? I would argue, you don't.

 

[Baron Samedi]

If you have millions of dollars, why do you even need life insurance? I would argue, you don't.

This is my view as well. I have a 20-year $1m term that I got during residency that I will not renew.