The first is that, as you say, no one invests all their money at the beginning of the period and cashes out at the end. Usually you invest some at the beginning and more at various points along the way. For example, someone who contributes part of their monthly paycheck. And since the stock market generally goes up, that means that you will inherently get lower returns than if you had invested all of your money at the beginning, simply because some of your money will not have been invested for the entire ride.
The fees included a Premium Expense Charge, Index Account Monthly charge, Cost of insurance, Monthly expense charges, Monthly policy charges, Additional rider charges. The Premium Expense Charge mentioned above came right out of the premium and was 4% in year 1, 6% in years 2-10, and falls to 2% in years 11+ (may change but guaranteed not to exceed 6%). With these types of fees, it is no wonder the actual investment results are way lower than the 8% per year compounded that formed the basis of the simulation. After 20 years of paying ~$400 monthly premiums, the 30 year value of your investment (assuming no withdrawals) resulted in a gain of $251,000. If you managed to invest somewhere with the same $400 monthly premiums for 20 years in an investment where you could actually get 8% compounded per year without any fees, the result after 30 years would be a gain of $422,225.
In the United States, the underwriting loss of property and casualty insurance companies was $142.3 billion in the five years ending 2003. But overall profit for the same period was $68.4 billion, as the result of float. Some insurance industry insiders, most notably Hank Greenberg, do not believe that it is forever possible to sustain a profit from float without an underwriting profit as well, but this opinion is not universally held.
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I agree that it isn’t a good investment. However, that doesn’t make whole life a bad insurance policy. As I mentioned before, I realized a lot of things in my years working for a mortuary. First, the vast majority of life insurance policies that we filed were whole life (I would guess 80-90%). Why? Because people who are in their 70’s, 80’s, and 90’s don’t have term policies anymore. And I’ve seen all kinds of things happen to people who have planned well financially. Getting old and having to go into a nursing home generally means depleting one’s assets. With nursing homes in my area costing $5000 per month (and more in some areas), it may not take long to go through someone’s savings. Once they go through all of their assets, Medicaid will pick up the tab for the nursing home bill. Having whole life leaves money at the end regardless of what unforeseen circumstances happen. I’ve seen it happen hundreds of times….I’m guessing that those families didn’t think it was such a bad deal.

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The mortality tables provide a baseline for the cost of insurance, but the health and family history of the individual applicant is also taken into account (except in the case of Group policies). This investigation and resulting evaluation is termed underwriting. Health and lifestyle questions are asked, with certain responses possibly meriting further investigation. Specific factors that may be considered by underwriters include:
Great read (http://momanddadmoney.com/insurance-and-investing-dont-play-well-together/ as well). Really taught me a lot. I’m a growing professional and a ‘friend’ tried to sell me a whole life participating life insurance. Like I believe you mention several times, all the ‘pros’ sounded really attractive. It actually made it sound stupid not to buy it. However, this alone made me hesitate as we all know what usually happens when something is too good to believe. I did a number of searches and read a few articles before stumbling on to yours. Excellently written providing a comprehensive explanation in terms that even a layman (i.e. me) could understand. Thank you as you just saved me from making a very big mistake. I hope others are lucky enough like me to happen upon your article before they make their decisions.
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I agree that it isn’t a good investment. However, that doesn’t make whole life a bad insurance policy. As I mentioned before, I realized a lot of things in my years working for a mortuary. First, the vast majority of life insurance policies that we filed were whole life (I would guess 80-90%). Why? Because people who are in their 70’s, 80’s, and 90’s don’t have term policies anymore. And I’ve seen all kinds of things happen to people who have planned well financially. Getting old and having to go into a nursing home generally means depleting one’s assets. With nursing homes in my area costing $5000 per month (and more in some areas), it may not take long to go through someone’s savings. Once they go through all of their assets, Medicaid will pick up the tab for the nursing home bill. Having whole life leaves money at the end regardless of what unforeseen circumstances happen. I’ve seen it happen hundreds of times….I’m guessing that those families didn’t think it was such a bad deal.

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5The monthly rate shown is for Preferred Elite based on a Male, age 37. Whole Life Advantage® is a whole life insurance policy issued by Allstate Life Insurance Company, 3075 Sanders Rd, Northbrook IL 60062. Whole Life Advantage is available in most states with series LU11040 or form ICC12A1. In New York, issued by Allstate Life Insurance Company of New York, Hauppauge, NY, and is available with contract NYLU796.
As for it being undiversified, NO investment by itself is completely diversified. Cash value life insurance can ADD diversity and security to a portfolio (the top companies have incredible financial strength, good policies can have a solid conservative return while meeting a life insurance need). Diversification is an issue with cash value life insurance if it makes up a good portion of your assets, and if it would, you shouldn’t be buying it.

3. I do understand that most investors are earning significantly less than what the market actually returns. That’s from behavioral errors and I don’t have any reason to believe that those errors disappear when you invest in a whole life insurance policy. In fact, my experience seems to show that whole life insurance tends to make the underperforance even worse, as it often takes 1-3 years before someone realizes just how poorly the product is performing. At that point, they’re even further behind than when they started.

Will you need life insurance when you’re 50-60? I’m assuming that the $13,000 per year you could put into universal life is on top of maxing out a 401(k), IRA and HSA, since those are very likely to be better savings avenues. If so, considering that you’re 22, I would imagine that you will be well on your way to financial independence by 50-60 and will have little, if any, need for life insurance at that point.


Your point about eventually not having to pay premiums is a common one used by agents, and in some cases that does happen. But in many cases it doesn’t, or at least it doesn’t happen as early as is illustrated and the policyholder is left paying premiums for longer than they had anticipated. The point is that this is not a guarantee, and it’s important for people to understand that.

In any case, once when I was younger, I used to think like the author, that you can overcome your risk tolerance and become a better investor if only you can control yourself and learn to love the equities roller coaster ride…now that I am in my mid-40s, I realize that I’m old school and conservative. I am happy with 5-6% return that is tax free risk free and doesn’t involve me making any decisions except how much I want to save this year.
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“Whole life has incredible benefits to protect against life events, I.e. disability…” This is what long-term disability insurance is for. A disability policy will cover all of your living expenses not just your life insurance premiums. It can even cover contributions to an IRA or other retirement savings vehicle. It’s much better and more cost effective true disability protection.
Several comments……first, I didn’t read all the posts so I apologize if this has already been discussed/addressed………you mentioned loans on a whole life policy is the means by which “tax free” income is distributed and that makes for the equivalent of double taxation, however the first monies coming out of a whole life policy would be your own contributions and therefore no taxation would be in effect as those monies, when contributed, had already been taxed…….the loan process would kick in when the policy detects taxable growth and would switch to loans instead of withdrawals………..also, let me just mention the insidious monster called “sequence of returns” and how it pertains to “returns” in the market……..returns in the market are reported by averages…….once you look at the “real rate of return” of a stock or mutual fund you might find the long term return of a whole life policy much more palatable……….example: what is the average rate of return in this example and real rate of return……..you have a $1,000,000 home and in the first year it goes down by 40%……….your home is worth $600,000…….the very next year your home goes up by 60%……..your home is now worth $960,000…….but what is going to be your reported average rate of return?……….10%, yet you are still under water; the “real rate of return is -4%…….this is a very eye opening expose on how the “market” makes things look…..it is the downs in the market that kill an investments return…….there are no downs in a whole life policy………..I hope this helps in perspective.

Products underwritten by Nationwide Mutual Insurance Company and Affiliated Companies. Not all Nationwide affiliated companies are mutual companies, and not all Nationwide members are insured by a mutual company. Subject to underwriting guidelines, review and approval. Products and discounts not available to all persons in all states. Nationwide Investment Services Corporation, member FINRA. Home Office: One Nationwide Plaza, Columbus, OH. Nationwide, the Nationwide N and Eagle and other marks displayed on this page are service marks of Nationwide Mutual Insurance Company, unless otherwise disclosed. ©2019. Nationwide Mutual Insurance Company.
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Good question Steve. The full answer is that I don’t know exactly what options you have and it likely makes sense to talk to a good independent agent. But you are right that it is much harder to find affordable term life insurance as you get older, and in your case some kind of permanent insurance may make sense if you have an insurance need. Just make sure that you are only getting the features you need, and none that you don’t, so that your premium is being used as efficiently as possible. For example, if you are only buying it for the death benefit, do you need the cash value?


Because brokers work with a variety of insurance companies, they tend to have a broader understanding of companies’ offerings and key benefits. They are commission-based, which is a double-edged sword: they may be more motivated to earn your business year after year by getting you the best deal possible; or they may try to sell you a policy with unnecessary bells and whistles since that would pay them a higher commission. Regarding the double-edged sword: the best way to nail down the best deal possible is the annual review and re-shopping of coverage. The best way to avoid unnecessary “bells and whistles” is to remember that your needs guide what you purchase. If you don’t need “bells and whistles”, don’t purchase them. Approaching insurance this way is always the best way forward. Consider this: having options placed in front of you and explained in detail allows you the opportunity to hear about the newest “bells and whistles,” some of which may be just what you need or were looking for, but simply never asked about. Policies change, and new options are added by carriers all the time.

Social insurance can be many things to many people in many countries. But a summary of its essence is that it is a collection of insurance coverages (including components of life insurance, disability income insurance, unemployment insurance, health insurance, and others), plus retirement savings, that requires participation by all citizens. By forcing everyone in society to be a policyholder and pay premiums, it ensures that everyone can become a claimant when or if he/she needs to. Along the way this inevitably becomes related to other concepts such as the justice system and the welfare state. This is a large, complicated topic that engenders tremendous debate, which can be further studied in the following articles (and others):
Fifth, if you have maxed out all your tax-advantaged investment accounts, you are on track for all your other financial goals, you are able to enjoy a lifestyle that makes you happy, and you still have money leftover, then yes, some kind of permanent life insurance policy could possibly make sense. But it would need to be a policy that was specially designed to minimize fees and maximize growth, and you need to work with a certain kind of agent in order to have that done.
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Brokers are often able to get better rates on insurance policies for their clients than individuals buying insurance directly from the company. That is because insurance companies know that brokers have the experience to guide their clients to the right policies with the proper level of coverage. Policyholders who used brokers are less likely to make unnecessary claims or to be under insured, which ultimately saves the insurance companies money. The companies usually offer special broker pricing as a result — so that broker clients have lower cost options available to them. While agents may also get special pricing, they are working for the insurance company — not for you. A broker can offer a range of quotes from different insurers to give clients options that fit their needs and their budgets. This ability to shop for the best prices from a number of carriers typically saves clients who use brokers money.
Whole life insurance is a type of permanent life insurance designed to provide lifetime coverage. Because of the lifetime coverage period, whole life usually has higher premium payments than term life. Policy premium payments are typically fixed, and, unlike term, whole life has a cash value, which functions as a savings component and may accumulate tax-deferred over time.
Point Three: One of the catches of the whole life agent is “Whole life insurance never expires!” Okay let us imagine a house insurance agent selling you an addon savings plan to your house fire insurance. Say you eventually sell the house and move to an apartment. Now would you want to keep paying house insurance when you DO NOT HAVE A HOUSE ANYMOFE ??? 🙂 Or paying for car insurance when you no longer have a car??? So why would you want to keep paying for a poor savings plan that only saves the life insurance company any money??? 🙂

Actually I’m satisfied with your response. Because it makes sense, people without the money shouldn’t purchase whole life. We only tell our clients if they can afford it to purchase it. That’s common sense. And if you need something that will take care of your expenses when you are gone and don’t have a lot of money, then term is the way to go. If you have the money whole life is a good tool for tax diversification. But there is too much to talk about that those of us that are in the industry and are actually licensed to help people in these areas and it would take up too much space. We’d be having this discussion for months. But you make valid points, but to say whole life is a bad investment just seems wrong, because of the percentage of people that can use it, it works perfect. I have a friend who makes $80,000 a month who recently came into oil and was discouraged by blogs like this. After I explained to her how ridiculous blogs like this are for her situation she was actually calm and more receptive. I appreciate you informing the public. And in our jobs we do that well enough, I think instead of trying to be Dave Ramsey, you should just title it, “Why Whole Life is a Bad investment for the average Joe or 98% of the population.
If you are just starting to consider life insurance at the age of 60, your children are most likely grown up and on their own, and your needs are very different. You might want a small term life insurance policy that could cover your final expenses, or you might be looking for a term life or whole life policy that could provide for your spouse’s needs if he or she lives on after your passing.
You’re welcome Helen. If you have already surrendered the policy, the best thing you can do is simply make a good decision with the money you get back. If you are still considering whether or not you should surrender the policy, you need to ignore what the policy has done for you (or not done) in the past and focus only on what it should do going forward and compare that to the other options available to you. That’s something I can help you with if you’d like, and you can email me at matt@momanddadmoney.com if you want to learn more about that.

Regarding pension vs registered accounts: It is hard to know what is better, relying on your pension or relying on an individually held mutual fund account (or some variation thereof using other securities). This would require a close reading of the pension and securities legislation in your region. For us in Canada, a defined benefit pension (prescribed benefits upon retirement based on a formula where the employer is responsible for funding any shortfall) can be incredibly enticing due to the guarantees attached to them. It is the preferred pension and stacks up really well against defined contribution pensions (where employers match the contributions of employees to at least a certain degree and where the account grows until retirement and the pensioner draws down the account and is burdened with any shortfall) but defined benefit plans are going the way of the dodo over here. It’s still available to government employees but most private employers don’t want to take on the risk of having to meet funding requirements. That’s a huge liability on the balance sheet. In any case, pensions have a few benefits over individual savings vehicles. First, they benefit from reduced management fee pricing, thereby improving returns marginally over the course of fund accumulation. Second, they benefit from a longer investment horizon since they are always looking many years in the future as their pension liabilities are long-term by definition. Third, actuaries are required to evaluate pensions regularly to make sure funding targets are established and followed.

As for your question, I don’t believe I’ve ever reviewed a USAA whole life policy so I can’t comment on then specifically. I would simply encourage you to start by clarifying your personal goals and to then evaluate each option based on how well it will help you meet them. With that said, of your main goal is investing for retirement then I would typically encourage you to max out traditional retirement accounts before considering any kind of life insurance.

Except for the very wealthy, most people could benefit from a combination of a highly overfunded Whole Life Insurance policy, and a term policy to make up for the difference. For example, let’s say a 25 year old determines that he needs $3,000,000 of insurance. He might purchase a $1,000,000 Whole Life with an annual premium of $12,000, but overfund it buy paying $30,000. He would also get a term policy of $2,000,0000, which he might convert partially down the road, after the first Whole Life policy is well seasoned.
Many people have a 401(k) or other retirement plan with their employer. Just about everyone has the option of contributing to an IRA. Then there are regular taxable accounts. All of these options allow you to choose your investments, control your costs (though employer plans will be more limited here), diversify, and avoid the downsides of whole life insurance we’ve just gone over.
Third, yes the cash value of your whole life insurance is less susceptible to swings than the stock market. But it comes with far less upside AND you do not have to invest 100% of your money in the stock market. A smart asset allocation allows you to balance the upside of the stock market with the relatively safety of the bond market without all the negatives of a whole life insurance policy.
The insurance company calculates the policy prices (premiums) at a level sufficient to fund claims, cover administrative costs, and provide a profit. The cost of insurance is determined using mortality tables calculated by actuaries. Mortality tables are statistically based tables showing expected annual mortality rates of people at different ages. Put simply, people are more likely to die as they get older and the mortality tables enable the insurance companies to calculate the risk and increase premiums with age accordingly. Such estimates can be important in taxation regulation.[10][11] 

Hi Matt, Enjoyed the article. I agree with a lot of what I have seen up here, both by you and other commenters. I believe that a lot of the typical Dave Ramsey advice applies to the vast majority of the population, who can’t afford to pay $500 month premiums w/$500 month overfunds. Yeah, if you’re in a position where that amount is no more than 20% of your savings, wow & congrats, and it could possibly be a good idea. But that’s like 50% of mine. As someone who is new to investing and just a year out of school, I recently sat down with a guy from one of the more respectable companies in the WLI market. I truly believe it would have been a good deal for a very select group of individuals, but for me, there were two main turn-offs. First, I simply couldn’t commit to send such a large portion of my savings for the next 10, 20, or 30 years. But secondly, I just didn’t fully understand the policy. From other comments, I think others are in the same boat. These things are confusing, I asked lots of questions but still it just didn’t make sense what was going on with every level. I’ve done my research on saving/investing, and gotten a pretty good grasp so far of my strategy, but my mind still just hasn’t fully grasped WLI. So I backed off. And I’d encourage everyone to do the same – if you don’t know exactly what it is that you’re doing and can’t understand or explain it, then don’t get in to it.
Each type of life insurance product has its advantages and disadvantages. You can’t say term life is the best, whole life is the best or universal life is the best. It depends on what an individual client need and his or her situation. As a client, they should know all the advantages and disadvantages but of course, they are under the supervision of a certain type of insurance agent that can be biased and try to sell what they have to offer to form their companies. Avoid an agent that focuses on selling one type of product. Talk to an agent who can provide the knowledge of each type and you can choose what best for you.
An insurance broker is experienced in different types of insurance and risk management. They help individuals and companies procure insurance for themselves, their homes, their businesses or their families. Brokers may focus on one particular type of insurance or industry, or they could provide advice on many different types of insurance. They provide a service to their customers in helping them find and buy insurance — usually at no cost to their client.
Hey Mark. Thanks for the kind words and you make a great point! That’s a big reason for #5 in the article. With the speed at which life can change, locking yourself into paying those premiums for decades is just so limiting. And you go even further than that here with simply wanting to invest the money you’ve already put in differently, and I couldn’t agree with you more. It adds a lot of inflexibility to your planning which can make figuring out the other pieces a lot more difficult.
7. The withdrawals you took out in the (distant) future was marketed as a tax free alternative to a 401k or 529 payout for retirement or college or for any expense really. And at 0% interest (after 10 years), you don’t really have to pay back the loan. It can basically be used as your personal piggy bank. The salesman said that the advantage over 401k/IRA was that you did not have to wait for a certain age. The advantage over 529 was that, if your kid got a scholarship, then the money in your FFIUL would not cause any conflicts in receiving the scholarship money similar to a 529 where the government would tell you to spend the money in the 529 first before cashing in the scholarship.

NerdWallet averaged rates for 40-year-old men and women for 20 ZIP codes in each state and Washington, D.C., from the largest insurers, up to 12 in each state. “Good drivers” had no moving violations on record and credit in the “good” tier as reported to each insurer. For the other two driver profiles, we changed the credit tier to “poor” or added one at-fault accident, keeping everything else the same. Sample drivers had the following coverage limits:

An entity seeking to transfer risk (an individual, corporation, or association of any type, etc.) becomes the 'insured' party once risk is assumed by an 'insurer', the insuring party, by means of a contract, called an insurance policy. Generally, an insurance contract includes, at a minimum, the following elements: identification of participating parties (the insurer, the insured, the beneficiaries), the premium, the period of coverage, the particular loss event covered, the amount of coverage (i.e., the amount to be paid to the insured or beneficiary in the event of a loss), and exclusions (events not covered). An insured is thus said to be "indemnified" against the loss covered in the policy.
Therein lies the problem. The asset you are securing is not the cash and too many people sell it that way and then the client views it that way. The asset is the death benefit. I know of no other asset where you can essentially secure a million dollar tax free asset at a 60% discount with about 2% down. The cash value build up is a an added bonus as I see it which provides great liquidity later on and also provides for quite a bit of optionality. With respect to term insurance, most people outlive their term so I would argue term is more expensive. I own both, but when I look at my term, if I pay premiums and outlive my term, I will have sunken about 250,000 into the contract and will have gotten zero for it. My permanent insurance will be paid to a beneficiary no matter what. Also people die including children. We need to take a cold look at what would happen if ine of our children died. How do you pay for the funeral? Do you need counseling? Will you go back to work immediately? Would you want to give it to charity or start one in your child’s name? I bought them for each of my kids. They are my favorite asset because I guaranteed their insurability. I have a few friends who have children with diabetes. Most carriers will not insure diabetics. My friends thankfully bought their children policies before they were diagnosed. I would agree permanent insurance is not for everyone, but more people should use at least a small piece of it S part of their plan. I also think they are extremely valuable when a person has the capacity to shrink down the insurance and load it with cash, as you mentioned above. Anytime the IRS puts limits on a vehicle as they do on permanent vehicles or any vehicle for that matter, I tend to think that is a good asset or vehicle for your money.
The financial stability and strength of an insurance company should be a major consideration when buying an insurance contract. An insurance premium paid currently provides coverage for losses that might arise many years in the future. For that reason, the viability of the insurance carrier is very important. In recent years, a number of insurance companies have become insolvent, leaving their policyholders with no coverage (or coverage only from a government-backed insurance pool or other arrangement with less attractive payouts for losses). A number of independent rating agencies provide information and rate the financial viability of insurance companies.
Naturally, the float method is difficult to carry out in an economically depressed period. Bear markets do cause insurers to shift away from investments and to toughen up their underwriting standards, so a poor economy generally means high insurance premiums. This tendency to swing between profitable and unprofitable periods over time is commonly known as the underwriting, or insurance, cycle.[25]

In the United States, economists and consumer advocates generally consider insurance to be worthwhile for low-probability, catastrophic losses, but not for high-probability, small losses. Because of this, consumers are advised to select high deductibles and to not insure losses which would not cause a disruption in their life. However, consumers have shown a tendency to prefer low deductibles and to prefer to insure relatively high-probability, small losses over low-probability, perhaps due to not understanding or ignoring the low-probability risk. This is associated with reduced purchasing of insurance against low-probability losses, and may result in increased inefficiencies from moral hazard.[52]

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