Second, I would say that it’s debatable whether whole life insurance is actually better than a savings account or CD, in terms of a savings vehicle. You mention the guaranteed return. Well, as I mention in the post, my policy had a “4% guaranteed return”, but when I ran the numbers it only actually amounted to 0.74% event after 40 years. It was less before that. And this was from one of the top mutual life insurers in the country. Not only is that incredibly misleading (and that’s being kind), I can get a better guaranteed rate than that right now from an online savings account, even though interest rates are at an all-time low. And my online savings account doesn’t have any of the other huge drawbacks that are also mentioned in the article.
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Beyond that, I do agree that whole life insurance can be useful in certain situations when structured properly. But those situations are few and far between and they require the help of someone who both knows the ins and outs of these policies AND is willing to put the client’s interests over their own financial interests (i.e. minimizing commissions and other costs on the policy). That kind of person is also difficult to find.
And I agree with you Matt. People that just try to make a buck on someone else’s loss or something they truly can’t afford is despicable to me. And I apologize for my “are you licensed?” Comment. Your actually doing a noble thing as a father and informing people that need to hold on to what they can or invest it correctly in this economy. I have a lot of business owners and high end clients and I sell them whole life for a ton of reasons. But for my blue collar average joe or even white collar for that matter, I just wanna take care of them and their families. They’re not my customers their my clients. And that’s drilled into us by New York Life, I hope you have continued success in your Financial Planning career. God bless you.
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I bought a whole life insurance policy for my daughter when she was 4! What a mistake to make! Now that the policy is 21 years old, I am undecided whether to continue paying the annual premium or surrender the policy.I have paid $25,126 over the years, and will walk away with $36,250 if I surrender it now. The policy covers has a $100,000 coverage and the annual premium is now $1179. I would appreciate your advice!
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You’re right, there is a guaranteed portion of these policies. And like I say in the post, that guaranteed portion is nowhere near the illustrated return and is much less attractive than how it’s presented (e.g. a 4% “guaranteed” return is not actually anywhere near 4%). So to say that there’s a guarantee and somehow equate that to the numbers you presented earlier is, in my mind, misleading.
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.
2Partial withdrawals and surrenders from life policies are generally taxed as ordinary income to the extent the withdrawal exceeds your investment in the contract, which is also called the "basis." In some situations, partial withdrawals during the first 15 policy years may result in taxable income prior to recovery of the investment in the contract. Loans are generally not taxable if taken from a life insurance policy that is not a modified endowment contract. However, when cash values are used to repay a loan, the transaction is treated like a withdrawal and taxed accordingly. If a policy is a modified endowment contract, loans are treated as a taxable distribution to the extent of policy gain. On a modified endowment contract, loans, withdrawals and surrenders are treated first as distributions of the policy gain subject to ordinary income taxation, and may be subject to an additional 10% federal tax penalty if made prior to age 59½. Loans, if not repaid, and withdrawals reduce the policy's death benefit and cash value.
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In my experience it is rare to find a policy for which the cash value growth by year 6 doesn’t exceed the annual premium (except for policies purchased at older ages, or policies of low face amounts, which have inherently higher costs), that is more than likely to hold true by year 9 or 10! Catching onto some words in my statement, while ignoring the facts presented, doesn’t make you more credible. I challenge you to post images of inforce illustrations where cash value growth is less that the annual premium by year 6.
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According to the section 80C of the Income Tax Act, 1961 (of Indian penal code) premiums paid towards a valid life insurance policy can be exempted from the taxable income. Along with life insurance premium, section 80C allows exemption for other financial instruments such as Employee Provident Fund (EPF), Public Provident Fund (PPF), Equity Linked Savings Scheme (ELSS), National Savings Certificate (NSC), health insurance premium are some of them. The total amount that can be exempted from the taxable income for section 80C is capped at a maximum of INR 150,000. The exemptions are eligible for individuals (Indian citizens) or Hindu Undivided Family (HUF).
But here is the key: the most astute line in the article is “If you have a large amount of money, have already maxed out all of your tax-deferred savings, and you can afford to front-load your policy with large payments in the first several years, it can provide better returns than was discussed above. It is a useful product in a limited number of cases.”
My advice: Load up on Term, especially when you are young and healthy, but make sure it is renewable and convertible. As well, buy some permanent coverage to at least pay for final expenses. When you buy term insurance the premiums are gone forever. Unless you die no one benefits. At least with whole life insurance someone will get back all, and in most cases more, than you ever put in. The most important question to be answered when getting insurance is, how much do you need? Typically, you will need 5 – 10 times your income plus debt coverage, if you have someone financially dependent upon you.
I have a few whole life policies. I was older when I really started to save and have the ability to pay into these accounts now (one I paid $95,000 right at start) and started late on a 401K. I max out my 401K contributions every year (I’m in the 50+ catch up department) so I believe the thinking was that these policies were the best option given my late start. Is that true? It seems your article is geared toward the young investor.