Is Whole Life Insurance Overpriced?

The following is a guest post from Michael, the administrator and primary writer for The Life Insurance Insider. He's worked in the life insurance industry as an actuary for about ten years doing company financials, product development, experience studies, underwriting, and marketing and currently works for Garden State Life Insurance Company.

When I try to defend whole life insurance, I usually feel like the lone voice of reason trying to fend off the angry mob.  Am I the only person short of evil insurance companies and money-grabbing agents to think that there might be a true purpose and place for permanent life insurance coverage in someone’s portfolio?  I am a big Dave Ramsey fan, but I cringe every time I hear him refer to any kind of permanent life insurance or anything with cash value as “rip-off insurance”.  I’d like to offer some facts that contradict the seemingly prevailing mind-set that whole life insurance is a bad deal.  

Most people give the argument that whole life insurance is overpriced or a “rip-off” when they see how much higher whole life insurance premiums are than term life insurance premiums for the same amount of death benefit.  It is true that in every company product portfolio I have ever looked at the whole life insurance premium is more expensive than the corresponding term life insurance premium for a given insured.  It is also true that every company’s thirty-year term product is more expensive than their ten-year term product. 

I ran a $500,000 quote for myself on one of the most competitive term life insurance companies in the market right now.  Their ten-year level term annual premium was $165 and the thirty-year rate was $455.  Does that make their thirty year product overpriced?  Does that make it a “rip-off”?  Of course not!  It is one of the most competitive thirty-year rates you can find.  

The longer the rate is guaranteed, the more risk there is for the insurance company.  Life insurance’s main purpose is to transfer your financial risks from death to the insurance company.  Based on its underwriting, the insurance company can be much more certain about your mortality risk five years out than it can fifty-five years out.  Whole life insurance premiums are more expensive because you are transferring the most amount of risk to the insurance company.  You can keep that mortality risk that will come thirty or forty years into the future and pay a lower term premium, or you can give that risk to the insurance company in exchange for a higher whole life premium. 

Everybody has a different risk tolerance.  Personally, I have a twenty year level term policy, but I realize that I am going to be taking on my own mortality risk in twenty years.  I am counting on the fact that I will have my house paid off in fifteen years and a lot of money saved up for retirement just like Dave Ramsey says.  That is my financial plan. 

What about the guy that is not comfortable with that risk?  He is afraid that he might not have his house paid off and pile of money in mutual funds in twenty years.  Is he a fool for wanting to pay more in order to transfer more of his risk over to the insurance company?  Sure it may take him a little longer to save for retirement or pay off his house if he has to pay a higher life insurance premium, but maybe he wants to make sure he has achieved his financial security goals before his life insurance safety net goes away.  I have trouble saying that the insurance company is treating him unfairly or an agent has tricked him by providing a product that allows him to get rid of that risk. 

Comments

[Apex]

Unfortunately this article does nothing to offer support for whether or not the product is over-priced. The analogy between longer and shorter term policies is not a very good one because in whole life the underlying premiums as I understand them are not fixed for the entire term of the policy. They actually increase when you get older just like term does. The idea is that the dividends of the policy will be able to carry it by then. That hasn't worked out so well in recent years with interest in the tank.

There is an easy way to determine if whole life is over-priced. How much profit does a life insurance company make per dollar of premium over the life of the policy on a whole life policy and how much commission does a salesman make per dollar of premium over the life of the policy as compared to a term policy. That will be a good indicator of whether or not the insurance is over-priced. If the company and the salesman are extracting much more of your money into their pockets then you are buying something with a higher percentage going to other people. You could think of it like a high cost mutual fund versus a low cost one. If more money goes to those selling the product that leaves less "value" for you. I do know from having a salesman in the family that he says it is not worth his time to sell term, his commissions are paltry compared to whole life or so he says.

While the general points of the article that argue if something costs more doesn't mean it is automatically over-priced are true, it is also true that some things that cost more are over-priced and nothing is offered here to prove that whole life is not one of those things that costs more and is over-priced.

He could be right that its not over-priced but unfortunately he offers nothing of substance to argue otherwise.

[dogatemyfinances]

Uh, you seemed to have missed every single criticism of whole life. Admin costs, red tape, huge commissions, poor rate of return, and so on.

Perhaps you need to get Total Money Makeover. It's written at a fourth grade reading level, like this post.

[Benjamin Bryan]

Money /now/ is worth more to me than money later. I'd much rather get term life insurance and pay a lower rate now while I'm young and a higher rate later when I earn more--and also need less insurance since I will have more in savings/retirement (although I never plan on retiring, just having the ability to). The extra money I'm not spending on whole life insurance can be used to invest or pay down our mortgage faster (thus reducing my need for as much life insurance), and I won't feel like I'm locked in to one company if I don't like their service or viability down the road.

I would rather keep my investments separate from my insurance and keep my options open. It's just my preference.

[Frank]

I agree with the previous comments, this post doesn't really make an argument in favor of whole life at all. In fact, by ignoring the obvious objections it only makes the case against more convincing.

The real tragedy of whole life is that there is no reason it has to be a bad deal, but as a pratical matter it is becuase the companies that sell it charge so much.

[cmadler]

Apex: I think you are confusing a simple whole life policy with the more complicated universal and variable universal life policies.

Anyone who categorically says that whole life insurance is over-priced simply does not understand how insurance works.

At the root, all insurance has the same cost. If I want to buy $250,000 of insurance, the cost of insurance is the same, whether I buy 1-year, 10-year, 20-year, whole life, universal, or variable. If I die the day after I buy the policy, the insurance company pays the same amount regardless, and my likelihood of death does not change if I buy 10-year or whole life insurance.

So why is a 5-year term policy cheaper than a 20-year term policy? Because every year that passes, I am more likely to die. So ignore the cash value buildup in whole life policy, and think of it as term insurance that goes to age 100 (for a 30-year-old, it is equivalent to buying a 70-year term policy).

To offer another apples-to-apples comparison, compare the lifetime cost of continually buying 10-year term policies or buying a whole life policy at age 30. You will find that by the time you reach your 50s or 60s, the cost is even, and in the 70s and 80s, the whole life is far less expensive — if you are even healthy enough to get a new term policy at that age!

Term insurance makes the most sense if you need insurance to cover a specific need that will end at a specific time (e.g. mortage); remember, however, that new needs are likely to arise.

[energyfinance]

It's very telling that the writer chooses level term insurance for himself.

I think the writer needs to stop using the word risk for the word responsibility. It's not "risk" he is taking by choosing a cheaper insurance product and paying down the house himself -- it's responsibility for his own financial situation. In essence, the writer is advocating that people who don't want to take the responsibility for their own financial plan should rely on insurance products to force them to save. What's the problem with this? High fees and inefficient saving products.

Why don't we just teach people sound financial principles rather than teaching them to lean on others to do it for them (at high cost)? Teaching people it's OK to be "risk averse" (i.e. "responsibility averse") is just making the issue worse.

[Jim]

Isn't the goal of term life insurance to have a policy that covers you until you have enough means (i.e. retirement account) to no longer need insurance? To me that makes the most sense. I hope I don't need an insurance policy when I'm 75 to take care of my loved ones when I "kick the bucket". I hope I have been responsible enough to save money all along. I'd rather have a cheaper policy that covers me for a set # of years and invest the rest in a much cheaper and more effective way.

[Swamproot]

Shoot, I think he should also compare buying whole life against buying term and buying CDs with the difference. In which case would the cash value be worth more? I think that comparison would be the most telling.

[Jim]

What is the premium cost for a whole life policy with $500k of coverage?

I honestly don't have much knowledge of what the stuff costs. To know if its too expensive or not I need to know what the premiums are.

My concern with whole life is that I could just buy term and then invest the difference and come out with a big pile of cash 20-30 years later. That pile of cash may be worth more than the total whole life policy value.

[Dave]

Way to create a strawman argument, Michael. If you want to address whole vs. term life insurance, you must address the REAL problems with whole. Ultimately, I think it's less about risk than it is effeciency. Whole life is not a good vehicle for investing in markets. They have huge fees, low rates of returns, and they lock in your money for a significant period of time.

[chynnalemay]

As a former financial planner of 16~ years I endorse whole life insurance (or guaranteed death benefit Universal Life) for PART of almost eveyones plan! There are permananent "needs" at death that NEVER go away: final expenses, a need for income for survivors, estate settlement costs, medical costs not covered by medical insurance, etc., Whole Life takes care of those needs for "pennies that produce dollars" the long term future. Later in life you can STOP paying pemiums on whole life and STILL HAVE a death benefit forever! The cash value, while very modest is still available to borrow or "cash out" if you decide otherwise. I have two polices that at age 47 (I retired early), I'll NEVER pay another cent of premium on but, I have a PERMANENT ddeath benefit. My heirs know that there will be "instant cash" to cover settling the will, funeral, a couple months bills, etc., Term is great to insure consumer debts, a mortgage, the kids college, etc., those "needs" over time should go away, Whole Life works for permanent needs and is very affordable over the long term "if" you buy it reasonably young and are healthy. Then you'l never have to worry about renewals or uninsurability! Load up on term, but, be sure it's convertible at least in part to Whole Life if you can't start with some Whole Life today. It's smart long term planning but, you have to cover some of those very long term needs that outlive term. It always pays off! Suze' O and Dave R try to simpliify life too much, it's not that easy. And, as a multi-millionaire, why would I even bother owning Whole Life? - think about it! (Have you ever REALLY met a buy, term invest the rest" person that did just that for 40+ years? What if that forty years just ended THIS year w/ markets down 60%~??)

[Frank]

I agree with chynnalemay. Anyone who just dismissed whole life or even variable universal life probably isn't looking at the big picture. And no one has even mentioned the tax benefits of transfering wealth via life insurance. Have you ever noticed that really rich people have whole life policies? It's so they can pass their wealth down the line when they are gone.

[Swamproot]

But, Frank, really rich people NEED vehicles to pass wealth. Most of us are under the exemption, which is like what? 2 million dollars?

Yes, if I was rich, I might look into it for exactly that reason. But I don't think its one of those "habits" of rich folk they are always writing books about.

BTW, chynnalemay, I invest the difference, I have a ways to go to have done it 40 years, but I am doing it right now. At the end of your "40 years", you should not be 100% in the market, so you should not be down "60%" with the market.

Finally, it is my understanding that if you save your money and buy term and then get hit by a bus, your heirs get the money plus the value of the policy. If you build cash value in a whole life policy, your heirs will get the cash value that has accrued and the face value of the policy MINUS the cash value. So a 100,000 term policy with $30,000 in the bank is $130,000 and a 100,000 whole life policy with 30,000 in cash value pays 30,000 + 70,000.

Is this correct?

[Apex]

@swamproot

I wrote above against whole life but your assumption is wrong. The cash value does not get subtracted from the whole life policy. There are three parts to a whole life, the death benefit, the cash value and the accrued dividends/interest. At death it pays the death benefit + the accrued dividends/interest, but the cash value is not paid. That is only accessible if you cash out the policy before death, in that instance you would get the cash value + the accrued dividends/interest.

[chynalemay]

Get hit by abus and die the day after the term policies expires, after you just paid for the kids college, maybe paid off your mortgagge, bought a retirement home, long-term care insurence (whatever) and the "investd money" is usually spent down (or placed into an annuity to provide some income and not available as a lump sum) and not enough $$ are left to provide survivors a standard of living (you/spouse will need an income forever, that's a PERMANENT need thus, one need for permanent insurance), maybe not all of it was spent, but, most of it! In my years of planning with over 2000~ clients and $150M of invested wealth, I only met TWO folks that made buy term, invest the rest actually work...for one reason or another, others: they stop investing, spend some, get sick, lose a job, divorce, think they can do investing/insurance w/o a professional licensed agent/rep to assist, etc., and the 40+ years of investing (and compounding of far less) doesn't happen, I didn't say ALL insurance should be whole life, but, a "base amount" for permanent needs, the rest: term for the needs that disappear over time in event of premature death (raise the children, college, pay off mortgage, debts, etc.,- all good needs for term), I'm not even talking about estate planning for WL (or UL or VUL insurance) in my comment above, just my real world experiences, is it any wonder only about 5-10% of Americans are affluent? Get "some" WL, it'll serve you well and you cannot outlive it (somebody WILL collect!)...guaranteed..and if you are a multi-millionaire and still have some WL, (like myself) you could've bought term only but, have teh whole life insurance, cash values and no more premiums to pay! (You can't do that w/ term!)....:)yes, straight life, whole life in your formula above is correct, a guarantted plan B UL policy would be the death benefit + the cash value, "whole Life" has variations in UL and VUL but, they are mostly estate planning tools for reasons other than a death benefit. Mosst rem insurance does have a conversion to wl privledge (w/o proof of health) that can assist in the budget, so take advantage of it! Better yet, buy some WL in your 20's/30's, like I did, it's cheap...and in the loong run a smart business decision.

[blditbig]

It seems as if the stories told are more about ideals then they are about the math. The best reason for seperating insurance from investments is the control you have over how and where you can invest the difference. (Along with avoiding the high costs and fees associated with cash value insurance). The mortality cost inside of a whole life policy doesn't stop being charged when you get older, they just get paid by the dividends/interest earned inside the policy. If you just built a Roth IRA account for 30 years to say $500,000 at age 65, the interest/divedends at 5% could pay out $25,000 a year tax free. That could pay for alot of term coverage. Just make sure the term policy you buy is guarateed renewable till age 90 or later.

[David]

So you can buy 30 year level term for $455 a YEAR. What can you buy whole life for? My guess is that it is at least $455 a MONTH. That is the rip off. All this for a 2% return. When I was looking at whole life it was like $100 month for $25,000 in coverage, total rip off. That is the comparison you want. Plus when you die the insurance company steals your cash value. Another rip off. Dave Ramsey is dead right on this one. Also, I would be willing to bet that more whole life policies lapse than term policies due to the much higher premium.

[Rick]

Hope you can afford that "renewable term" premium in your 70's/80's, (you won't!) And, the longest period to buy level premium term is 30 years anyway...Actually, about 94% of all sold term ins either is canx'd (cuz cost goes WAY UP at renewal) or expires w/o a death benefit being paid - it is the PROFIT maker for ins co's, I knowI worked for several...just ask a half dozen folks w/ over a million $$+ or more LIQUID net worth and a half dozen or so who don't have a pot to pee in...guess which group will have all/almost all whole life owners? Whole Life YOU own and control-short and long term, term is like renting, great fior the short term (needs) buy BOTH, WL for permanaent needs, term for TEMPORARY needs...Chynalemay is right on here, the human habits, not the "numbers" are telling..

[blditbig]

Based on your assumptions, I guess we humans just aren't smart enough to figure out how to manage our own money. The pitch that Rick talks about has been used buy the insurance industry for many years. It seems to work quite well for the people who are generally clueless about life insurance (which is most people). Did anyone notice that nothing was said about the $500,000 being available to survivors in cash if the insured were to die. So any need for further insurance is paid for by the Roth IRA account (if needed). I heard a comment from an agent many years ago, who said, "If I sell term I can't eat... If I sell whole life, I can't sleep".

[blditbig]

I heard a phrase from an agent many years ago, it was "If I sell term I can't eat... If I sell whole life I can't sleep". I guess you don't mind losing sleep.

[Rick]

So, how many people do YOU know that HAVE the discipline and the $500K~???, THAT's the point, not many, ...in theory yes, reality no, humans (Americans especially) aren't smart with money/investing at all, THAT's why they can have such a high standard of take home pay (w/ low taxes and ability to invest) and instead the masses just overconsume and end up ill prepared to retire, sad, but, VERY true,... and besides...most folks won't die till that term policy has long expired, and they won't have much to show in investments, that's a fact with a savings rate in the single digits, instead of 15% or more that IS a prudent number for financial success...working for an insurance co(s) we know that, and now have developed many other products (annuities variable and fixed w// riders, insurance, etc.,) to attempt to overcome this problem. Those products would NOT be needed IF folks simply avoided debt and saved 15% or more, but, they don't! Thus, a need for whole life, so they can spend the little investments they do manage w/o haviong to "put them asside" as a death benefit - instead of a living one...look it up!

[Brad]

It's like being fat, it's pretty easy not to be..., consume as many (or less) calories than you burn, pretty simple huh?,money is the same, EMOTIONAl not logical for teh VAST majority (and more) of population (too bad though but, it is!) like Whole Life and term/invest the restargument; so why isn't everybody fit and thin?? Human HABITS, I got WL, and plenty of term through work and have had several times had to stop/redeem investments, whew, glad the whole life will be there when I'm not!! And, with my health and age not so "affordable" I'm glad that agent suggested it for the reasons I've read above - sooo true!;

[blditbig]

The point I'm trying to make is if someone has focused their attention to the end in mind, they should have paid down their debts, have NO mortgage payments and a decent pension or retirement account providing cash flow. Why would they want to or need to pay for any life insurance at that point? Buy the way, I know many people in that category (including my parents) that don't care to spend a dime on an expensive insurance policy.

[Alquaest1]

If they (parents) had whole life insurance it would be mostly "paid up" and they would have NO premiums to pay but, have a cash value to access (if THEY choose) and a tax free death benefit, to replace the lost pension and social security when one dies (no capital gains nor losses in a down market to worry about)...think 'bout that!

[Apex]

For those who want to claim people don't have the discipline to do the term/invest thing and thats why they should do whole life. I would offer that most people who do the term thing don't invest the difference because there is no difference. They spend 500 bucks per year to get a 750K or 1 million dollar 30 year level term policy that will carry their family for 15-20 years if they die. So this is compared to the person who does what exactly? Takes out a 1 million dollar whole life policy? Thats the difference. That's baloney.

No one (except really rich people and who cares about them, none of us are them) can afford a 1 million dollar whole life policy. It would cost atleast 10K a year, probably more if you weren't really young.

So what we are really talking about is someone has 500 dollars (maybe $1000) per year to spend on life insurance. So what should he buy? 1 million term or 50K whole life. Which one is really protecting his family. And if he tries to buy 500K whole life, he will default on that policy before he gets 10 years in unless he is really really financially solid.

Someone here said the person doing the invest the difference thing has things happen that make them not invest the difference. Oh and the whole life guy doesn't? He has a 10K a year bill but "life events" apparently don't impact that. No they do and he can't pay it. So the guy with the 1 million dollar term policy has a 500 dollar per year payment, he is fine, he keeps his insurance. The whole life guy either has way to big of a payment and eventually can't pay it or he has way too little insurance and if he dies, he might as well have left his family a golden goose because his whole life policy will barely get them past the death costs.

Whole life is not any way to protect against death.

[Terry Pratt]

This is one of those cases where I'd really like to know What Would the Millionaire Next Door Do?

I'm confident that wealthy people, in general, are excellent risk managers, and are well-insured, and I think the rest of us could learn from their example.

[Sallie's Niece]

This article totally confused me. I'm getting married soon and thought maybe now was a good time to learn about life insurance and now I know less than I thought I did. :-(

[Tarah]

I have a Fixed Universal for what my burial should cost when I'm 90 years old with inflation. When that Universal is 10 years old, I won't have to make payments anymore, and since I got it when I was 28, I only have to pay $16/month on it, and it will cover me untill I'm 120 years old.

I also have a term policy that will cover child care/college/debts if I die prematurely. That one is $45 per quarter.

I have met too many 70-year-olds who need life insurance and have to get garaunteed-issue whole life to cover their burial because they now have poor health and can't afford to renew their term policy. There's no way I'm giving up my Universal policy.

Also, I think everyone is forgetting probate. If you pile up money to be self-insured, that money has to go through probate court, which can take up to 3 years. No funeral home will wait that long for their money, but if you have a life insurance policy, the funeral home will embalm and bury the person while they wait for the money to come in.

[James]

RE: Tarah

You don't have to go through probate if you have a living trust. All your assets are accessible immediately. I won't add to the Whole Life/Universal/Variable (they're all the same regardless of what some have said here) debate other than to say its a complete waste of money and often times misrepresented by the insurance agent. I should know something about the subject. I sold for one of the largest Insurance company's for over 10 years until I became an Investment Advisor and opened my own practice.

[Michael @ The Life Insurance Insider]

I was not really trying to spark the term vs. whole life debate here with my article. I just wanted to point out that having a product that offers a death benefit for the rest of your life is not a "rip-off". Are there agents that sell whole life for the wrong reasons? Sure, but why is that an indictment against the insurance. Is whole life insurance an investment that offers the most potential for reward? Heck no. Does it offer the most extensive option for transferring your mortality risk? I think it does.

I just wanted to point out that there is an inherent reason why whole life insurance is more expensive. It is to cover the added risk. If some world wide pandemic comes along and reduces life expectancies by 30% that life insurance company is on the hook for the rest of your life. If a cure for cancer comes along and increases life expectancies 30%, then you have the option to cancel your policy and go buy a cheaper one. You have given all of that mortality risk to the insurance company. With a term policy, the insurance company takes it on for a period and then you are on the hook again.

If you had a continuum of risk and reward, then it probably starts on one end with no life insurance, maximum investment. Then moves towards term life insurance for X years. As X increases so does the cost and thus reduces the amount you have to spend and invest. At the very end you would have whole life insurance for the least amount of risk and the least amount to spend and save.

That's essentially as far as my article tried to go.

[James]

RE Michael:

Whole Life Insurance and all forms of Insurance are not defined as "Investments". Matter of fact, if a Life Insurance agent refers in any way to the policy he is trying to sell you as being an "Investment", it is fraud and his license can and will be revoked by the State Insurance Commissioner. The sad reality is that many Insurance Agents refer to Whole Life Insurance as an investment and mislead their customers. Whole Life is absolutely a "rip-off". A portion (generally 1/3rd) of your premium pays for the Insurance portion and 2/3rds is generally used for the cash value portion. The problem is, if you were to save the exact amount it takes to fund the cash value portion of the policy, most often you'd have more money saved then what the company gives you. Another reason why its a "rip-off" is that most often times the agent never reveals the simple fact that you either get the face value of the Whole Life policy or you get the cash value. But you absolutely NEVER get both. So, all those years you were paying extra for your "investment" have gone to complete waste. Oh wait, your agent didn't tell you about that one? hmmmmm. I wonder why. Nothing beats taking control of your money. Sitting down each night and doing due diligence. If you're unable to do so for whatever reason, then the 2nd best alternative is to hire a professional money manager to handle your affairs. An Insurance agent is not a professional money manager and most often doesn't have the first clue on how to manage his own money let alone yours. Insurance is good for one kind of person and one kind of person only. The lazy person. Don't be lazy. Manage your own money and stop wasting it by giving it away to pay the salary's of the insurance agent whom most of them are college dropouts to begin with. If you were good at finance, you wouldn't be an insurance salesman. Fact. Next time you see an insurance agent, ask him what the 10 year Discounted Cash Flow of General Motors is. His deer in the headlight look should tell you what you need to know about his "professional" money knowledge.

[AB]

Not all insurance is created equal...

I think it is important to discuss the differences between so called "whole" life insurances. The posts are muddy the waters with Variable, Universal, Guarantee Universal etc...

Traditional Whole life, not UL or VUL, is an undivided product that Michael correctly describes as an efficient way to transfer risk to the insurance company for your "whole" life.

The newer divided products of the last 30 years, like UL, VUL, Indexed UL are basically buy term and invest the difference with an insurance company - and I agree that most disciplined savers/investors can do a better job by themselves. In fact, in my experience, most of these divided products aren't permanent as their term components get to expensive in the later years.

Boring, centuries old Traditional Whole life is what Michael is talking about. This is what the wealthy buy from a highly rated mutual insurance company (Northwestern Mutual, Guardian Life), not the newer divided products (UL, VUL) that are the only permanent-type products that stock insurance companies (AIG, Principal) can bring to the table.

Michael, maybe a post on stock versus mutual life insurance companies would benefit FMF readers.

FYI - read Michael's bio - he's an actuary - for those of you that are unfamiliar with actuarial science, they are the rocket scientists of the insurance field. I know - I married one:) Actuaries are required to pass numerous exams (two to three times as many as a CPA) and are the architects of all insurance products and risk management.

[Andy]

My comment is in mainly replying to certain individual in these posts who mentioned if he was rich , he would consider the purchase of a whole life insurance policy.

Do you believe , that it is money that makes money , or that wealth is the result of luck?. Or do you believe our wealth is the biproduct of our "Human Live Value". I use the term not only to describe the economic worth of our human lives but our education , abilities , training , talents ect.

If you understand that wealth is the result of the right mindset and then the implementations followed by that perspective. Then you would realize it is wrong to become wealthy and then change your mindset , it wont work that way. You must first change your perspective and implement your ideas and as a result , money will follow.

Once our clients understand how Whole Life can become an incredible wealth building tool, not only do they feel deceived by the "by term invest the difference crowd", but also they dont settle for anything less than the maximum amount of Insurance they can get. They cant buy enough of it. , even if they are average income. How they can pay for the large premiums is a matter that can be explained in another venue.

However , once they understand , that buy purchasing a Whole Life Insurance policy , they can literally leverage the full value of their death benefit the next day. They want more Whole Life Insurance than it exists.

sincerely

Andy

[Michael @ The Life Insurance Insider]

Thanks for the clarification AB and rocket scientist reference. My wife and I had a nice chuckle over that. If I thought there was any chance that FMF was interested, then I could certainly bore you all with my mortality tables and utility risk functions.

I was referring to the traditional whole life insurance product with guaranteed level premiums and cash values in my discussion. There are also universal life insurance products available with guaranteed no lapse premiums that also apply (cash values are not guaranteed, but your insurance is if you make the minimum no lapse premium).

When you start talking about non guaranteed UL and VUL products you get into a whole other discussion and argument because the investment implications do take center stage. I don't really think UL products are inherently "rip-offs" either, they have a legitimate role in estate planning, but more people do get ripped off by them because they are frequently missold.

[James]

Insurance is not an investment. I keep reading posts on this discussion from various individuals saying that it is or at least eluding that it is. For the sake of this argument, lets say that it is. I'm a value investor from the school of Benjamin Graham. Lets take a grahamanian approach to deciding whether insurance, regardless of kind, is a "good" investment. Let's use a fairly reasonable hypothesis. We're paying $1200 annually for a life insurance policy that carries a $1,000,000 death benefit at termination. Our termination year for this individual is in 40 years at age 75. With the assumption that we will never pay a nickel more than $1200 in any given year, we have paid in $48,000 for our policy in 40 years. If $1,000,000 million is what our investment will return and $48,000 is what we payed for our investment; the result on our money is a 7.12% annualized return. Now, if you think you can do better than 7.12% on your money, you should look elsewhere. I know my return for 2008 was 28.7% and I expect this years to be so staggering of a positive return that I won't publicly publish it in this forum. As an investment, Ben Graham would take a pass on a 7.12% annualized return as well as Warren Buffet who has has averaged over 25% for his clients in the last 40+ years. For over 10 years he produced a 50% return for his clients. Furthermore, I doubt there are many 35 year old men paying $1200 for a life insurance policy that will provide $1,000,000 of coverage 40 years down the line. That is a very conservative number.

[James]

Continuation from previous post:

The reality of the matter is this. The $1,000,000 face policy 40 years from now isn't worth $1,000,000. With inflation at 3.5% (many say 5% and I shake my head) that $1,000,000 is really only worth $226,946.38. In reality you are only receiving a 3.96% return after paying for inflation. You are paying $1 per year in order to receive 4 cents per year in your return. Now, does this make sense? Certainly not for me and certainly not for the wealthy. Most wealthy individuals do not own insurance. Warren Buffett owns insurance companies yet he doesn't even own an insurance policy for himself. This simple reasoning is why. Is insurance an investment? I think the answer if obvious. Is it a waste of money? I think that answer is just as obvious. Of course to the person who makes a living off of insurance, he'll have a different point of view that he will always feel justified in and he should be. He needs to eat too. But, a rational thinker can see past all this. Good luck to you all in whatever you do.

[James]

I didn't think there would be that many people debating me about my points.

[The Life Insurer]

No, you are not the lone wolf. I often use whole life with clients whose planning strategies it fits. I like Dave Ramsey too, but he is way off base on this one. While term insurance is a great vehicle for temporary protection, the percentage of claims paid on these policies is reported to be about 1-2%. I wonder how many people there are out there who thought they would have enough assets to protect the family in case of the breadwinner's death who are now experiencing a greatly reduced net worth. The term policies they purchased 20 years ago are close to expiring and now, as they're 20 years older, they face much higher premiums. Term life is a great product, but permanent life insurance policies should never be viewed as rip-offs.

[Denise]

Whole life insurance is more expensive than term life. There is a cash element involved in a whole life policy which does not exist in a term life insurance policy. Whole life is a suitable option for those who have long term needs for life coverage. Since a whole life policy accrues cash value in time, the policy holder can withdraw cash amounts in times of need or use it to pay future premiums. Most people prefer a term life policy because it is cheaper, suits their budget and covers the time period when they have the most debts. For a more clear understanding of types of life insurance I would suggest you visit Types of Life Insurance.

Denise @ AccuQuote

[James]

You're both wrong. Any type of life insurance is a needless waste of money. Work hard, save your money, and invest wisely with a professional securities analyst and that is how you will guarantee yourself to be insured. Regardless if the market goes up or down, if you do those things and actually care about your money, you'll absolutely be fine. The problem is that the majority of people don't manage their money well because they don't care about their money. The only time they care about their money is when its gone. This is experience talking, not a salesman. Money should be one of the most important things you think about. If its not on your top 5 list, then you need to adjust your view of it. How many insurance companies went bankrupt this year? I know, do you? What happened to those policyholders? They certainly didn't get paid. The FDIC doesn't back insurance policy's. Think about it. ALL Life Insurance is a waste of money period.

[Wm]

james, i am a CFP so i dont have any particular biases. but your comments that life insurance is a waste of money is plain idiotic.

[James]

I sold life insurance for over 10 years. Sold my first policy when I was 19 years old. I was the youngest licensed insurance agent in the state of North Dakota history. NOTHING I do is idiotic. You friend are just not at the same level as I am. I currently am a registered investment advisor. There's a big difference between a CFP and what I am. You sell a product based on what percentage of commission you are receiving. I help people invest based on a very lengthy analytical process of number crunching. You are not mathematically knowledgeable enough to tell me my comment makes no sense or is idiotic. You're a patsy for the company you represent, I'm an unbiased reporter of facts.

[James]

Einstein said that there are 4 steps to knowledge. Intelligence, Brilliance, Genius, & Simple. Insurance, particularly Life Insurance, is anything but simple. Have you ever asked yourself why that is? It is that way to cloud your judgment; to cause confusion. When the mind becomes confused due to an overload of information it is impossible to make a rational decision. There is nothing rational about Life Insurance. It is a tool designed so technically challenging that its been put together on purposely to confuse. Many companies send their new agents away to a boot camp for a week and sometimes more just to learn how to sell it. History has shown that the products in life that are of the most use are the easiest ones to understand. If Life Insurance was such a benefit, It wouldn't take 100 pages and a 2 hour presentation by a salesman to begin to understand what it is. The simple fact is that its a tool of confusion. I have yet to see one person on this site disagree with my points that does not sell the product. The only people who can benefit from Life Insurance are the ones on the bottom of Einstein's list.

[James]

bringing rational thought into its simplest form can be described this way. You take a seed and you plant it into the ground. In a while it produces an apple bearing tree. You pick the apple, look at it for any deformities and determine that its good. You know the contents of that apple is good when you bite into it and see that the inside is as clean as the outside is. It is good for you. Now, you take an apple at the grocery store. It looks clean inside and out but you don't have any idea who grew that apple and under what conditions it was grown. It may look good on the outside and inside but you will only know in time whether it gives you cancer from all the chemicals that were used to produce that apple. By then, it could be too late. Look at the payout history of Life Insurance. Another poster posted 2% of all policy's written have been paid on. That's about right. If it were higher than 40%, Insurance companies would no longer be in business. The goal of an Insurance company is a simple one. To get your money period. My argument is a simple one. Keep your own money and learn how to manage it well. Insurance salesman are not money managers. There are more broke insurance salesman than there are successful ones and there's a reason for that. Why take advice from someone like that? Warren Buffett is the world's richest person because he took an idea that was already available to the world and applied it to his own life faithfully. He didn't invent a new idea and he didn't change the original idea that came from Benjamin Graham. He simply applied that idea. Do as the rich do, not as the poor and in time, you'll be rich yourself. The rich don't own life insurance.

[Chris]

@ James: "invest wisely with a professional securities analyst"

MWAH-HA-HA-HA-HA!!!! That's the funniest thing I've read all day... Whoo-ee! *wiping eyes*

[Chris]

#2 @ James:

"I am a Registered Investment Advisor..There's a big difference between a CFP and what I am."

AAAHHH-HA-HA-HA-HA!!! You kill me, man.. Do you really believe yourself? Now THAT'S the funniest thing I've read all day.. No wait, the analyst thing.. NO.. They are both about even.. HAR-HAR!!

[James]

Chris, are you a child? You certainly act like one. Very foolish and I'm not that interested in debating a child other than to say that I was a CFP by the time I was 22 years old and took my Investment Advisors course in my 30's. They don't teach anything about Discounted Cash Flows or the Weighted Average Cost of Capital in the CFP course I took so I'm fairly sure that's calculations that are above your knowledge base. Furthermore, I made a 27% return last year and am currently at 41% for this year so I don't know why you would mock the advice of using a security analyst other than your childish demeanor. Now be gone, I debate adults.

[John]

I didn't read everyone's comments, but deciding which company you purchase a whole life policy from is just as important as which company you purchase your term life policy from. For instance, the "quiet company" makes whole life a good deal. over thirty years their policies have earned a rate of return equal to common stocks with virtually no risk. What other asset class can do the same thing? There is none other out there. By the way, even this year the quiet company is providing a stable 6.5% dividend, and oh yeah, zero loss in cash value. There are around 1,100 insurance companies out there and the quiet company paid out about 30-33% of the dividends paid out in the whole industry. That's only one company!!! Obviously they are doing something right. There are so many other ways whole life is awesome, but term is also great if someone is poor and needs the coverage.

[Wm]

@james: " currently am a registered investment advisor. There's a big difference between a CFP and what I am. You sell a product based on what percentage of commission you are receiving" Do you even know what a CFP does or how they can be compensated? Really. Do you?

Ooooh, you can throw around big financial concepts like Discounted Cash Flows. BFD! Here's one - Capital Asset Pricing Model. I know what both terms mean. Everyone should invest with me! Are you living in mom's basement hawking "get rich in the stock market" schemes, or do you work for a chop shop?

Get over yourself.

[James]

@Wm LOL!, I was a CFP when I was in my early 20's. That's exactly why I'm informing people about them. A CFP payed $100 to take a test that will allow them to put the word "financial" on their business card. PERIOD. You don't need a college education to get a CFP designation. You don't need to know anything about finding the intrinsic value of a business to get a CFP designation. Matter of fact, you don't need anything other than a $100 bill and a couple days of study. Don't make your CFP designation sound any better than what it is. I own 3 homes and am in my 40's. Both of my parents are dead so no, I don't live with them :) Go "sell" a life insurance policy you big "salesman" you :)