Money in whole life insurance

[Shaun R.]

Anyone here listen to the Lab Coat Agents podcast?  I was listening to one this morning (https://podcasts.apple.com/us/...) and the guy was talking about putting your money into whole life insurance company's general funds.  He said they guarantee a 4% return and that you can borrow against it very easily.  I actually heard something very similar recently from an agent in my area.  This is news to me, but is this something anyone else is familiar with?  

[Zachary Paschke]

Originally posted by @Brian G.:

@Shaun R. be careful, whole life is 15-20x more expensive than term for the same pay out upon death (ie death benefit) but they are usually structured so the *Insurance Company Keeps* the savings component of the policy upon your death that you’ve been paying extra to build up. It’s not an efficient financial product imo especially when you can borrow against better performing investments (ie retirement accounts, taxable brokerage accounts, etc.) Buy term insurance, save the difference and invest in something else with a better return. 4%? No thanks. Is there anyone who recommends whole life insurance policies besides insurance salesmen? Maybe a Financial Planner on BP can weigh in? I’ve heard they can serve a purpose for a very small % of very wealthy individuals but can’t remember how exactly.

 Hey Brian, here’s a little clarity on some of the things you brought up:

1) fair warning I am a degenerate life insurance agent. 
2) Whole Life is more expensive than term (albeit not generally 15-20 times - usually more like 4 times) for 2 reasons:

     - It is guaranteed to pay out. Traditional term policies don’t get issued out past the age of 85 for a reason. That’s when the average person passes away. Over 95% term policies will never pay out. It is not the most cost effective way to get lifetime protection. There is a product called a GUL that offers the long term protection with reduced cash values for a savings in cost. 
    - Building cash value. Cash value is beneficial. Why buy stocks when options are less expensive? They’re different products for different purposes. There’s value in the extra money a stock brings. 

3) Is it really more expensive? I’ve done the math before. The average life insurance client takes out 7 life insurance policies over the course of their lives. Comparing the cost of one 20 year term policy to one whole life policy isn’t honest. If you insure yourself from age 20-80 that’s 4 20 year policies. Before you say you’ll be self insured, my average clients age 60 and that person is most often looking for another 10-20 year term policy (most are surprised they can’t get an off the shelf 30 year). 

If you’re healthy and young you can get $500k for around $30/month. You can’t if you’re 60. Someone age 60 looking for a term policy in average health will pay $380/month (it can cost much more depending on health). If you average that cost over the course of 60 years it works out to around $147,600. That is just cost. For something over 95% of people will never see a return on.

4) 4% guaranteed interest for a dividend earning WL policy is the minimum amount a policy will pay. WL companies with dividends find ways to pay competitive ones. 

5) Life insurance is not primarily an investment. I didn’t liquidate my rentals to buy more WL. I promise, I’m here for more than just following around Joe Splitrock. I’m here because I’m an active real estate investor. Permanent life insurance is a hedge. What if I die? What if I get sick? What if I need supplemental income when I retire? You can take out as many IRAs and brokerage accounts as you want. They won’t pay a death benefit. You die tomorrow and your family only has what’s in the account- hopefully it’s not a bad year. Hopefully I had enough money to feed it. If I have partners hopefully my wife can afford to pay them off if she doesn’t want to work with them. 

6) Most financial planners collect a commission. Their commission (unlike an insurance agent) is based on your assets managed. They make way more off investment accounts than they do life insurance. I had another agent tell me that a financial planner hired him to find out how to liquidate a clients life insurance policy. The agent explained it wasn’t in the best interest of the client, the financial planner told him he didn’t care - he just wanted the funds under management. They have just as much bias as an insurance agent if not more (unless they’re fee only - they’re still just sales people). Keep in mind during your CFP there are no classes on real estate. If an agent properly structures your policy for cash value accumulation they’re actually taking a significant discount on commissions. 

Which begs another question- who learns the ins and outs of the life insurance business for free? I’ve read a lot of articles and listened to a lot of podcasts about life insurance by people who are not agents and every single one has had factual errors. 

Yes, life insurance agents as well as financial planners, auto mechanics, lawyers, bartenders, real estate agents, property managers, doctors, and the guy at Best Buy are all sales people. These are people that are compensated for being experts at what they do. We’re no different. It takes a lot of work to be good at what I do. You can’t buy a life insurance policy without someone earning a commission. If I get arrested I’m not going to google a legal blog, I’m going to hire a lawyer. We are legally responsible for our recommendations that we make. 

7) I don’t recommend WL to all of my clients. This might be surprising. When a client comes to me with a need my recommendation is based on the best interest of the client, not my commission. Strangely Enough people talk about the commissions on WL policies. I make way more money from term policies. Term insurance is a cash cow for insurance companies because it rarely gets used. The profits from that go to paying WL dividends. For clients that do get WL policies we maximize them for growing cash value    A WL policy off the shelf doesn’t do that. 

8) Life insurance companies steal your cash value - not completely true. A WL policy has two parts. Cash value and an insurance component. The policy is designed for the insurance component to pay the difference between your cash value amount and the death benefit. The policy would be more expensive if you wanted both. Like I said before, if you simply want a death benefit until age 121, there’s cheaper ways to do it. 

9) You didn’t ask about taxes, but you invoked rich people and retirement accounts. Retirement accounts and specifically RMDs (especially for beneficiaries after a death) can cause real tax problems- God forbid you have a kid trying to find college when you pass and they have to take RMDs. The tax-free nature of life insurance policies. Wealthy people- life insurance is an easy way to transfer wealth. 

10) I almost forgot- borrowing from retirement accounts and brokerage accounts. Assuming you're not trying to suggest someone can borrow from an IRA- the process is much easier from a life insurance policy, no required payment schedules, and you don't have the 50% borrowing limit. Borrowing from IULs can be incredibly inexpensive as well. Suggesting that IULs or WL policies have low growth is just not true. Lower returns than market investing? Sometimes, not all the time. WL and IULs don't lose money. Once you get paid a dividend the company can't take it back because they had a bad year the following year. Speaking of 4% guaranteed- where else can you get that kind of interest (assuming you forget about the additional dividend payments) guaranteed?

Hope that was helpful despite the fact I’m a good-for-nothing sales person. 😉