It used to. It wasn’t that long ago, 30 years or so, when the only way a person could have permanent life insurance was with a whole life policy.
Whole life is a cash value policy that was defined as having a level premium to age 100 with a cash value that equaled the death benefit at age 100. On the face it sounds like something that everyone ought to have. Then came universal life insurance.
With universal life you could do the same thing, but they allowed you to vary the premium amount if there was sufficient cash value to cover any shortfall. What they didn’t tell you was that for everything to work out you had to pay back the loan. What most agents didn’t tell you in the beginning and I have to say, probably most still won’t mention is the fact that their is a huge difference between guarantees and assumptions.
Just a refresher from an old post, the two following attachments point out that difference.
Back to the question at hand though. Does it really make sense to build cash value in your life insurance? Should you buy whole life? I know this really fluffs the skirts up on all those old New York Life and Northwestern Mutual agents, but the answer is NO.
If you can buy life insurance (that is what you’re buying right) for one third or less of the price of a whole life policy, with a guaranteed level premium to age 100 and a guaranteed death benefit to age 120, why would you put that extra cash into your life insurance? Why wouldn’t you put it somewhere where you can build real cash value?
Bottom line. With the reality of the universal life with a no lapse guarantee type policy, whole life is nothing more than a way for agents to make more money from you than they should. It is a cash cow for the agent and the insurance company and a cash drain for you.
Interesting comment if you read the balance of it by following his link back to his website. He is a strong believer in whole life and I won’t waste my time picking his arguments apart except to say that , not unlike my challenges of the past, if you can show me a whole life illustration that I cannot beat at a better price with benefits that go on forever, I will eat the illustration.
Same response as the first time you commented on my blog with a link back to your take on life insurance. “Interesting comment if you read the balance of it by following his link back to his website. He is a strong believer in whole life and I won’t waste my time picking his arguments apart except to say that , not unlike my challenges of the past, if you can show me a whole life illustration that I cannot beat at a better price with benefits that go on forever, I will eat the illustration.”
I am the owner of the website above. Not sure who posted this here, but I found your site as a referrer on my stats, and thought I’d stop by.
Can’t say that I agree with the old BTID idea, but then I did run the numbers going both ways before deciding on how to structure my business. I also looked at the real costs and assumptions being made about term insurance and the most common “invest the difference” component – mutual funds. I’m sure you could substitute it with about any financial product there, but you don’t have to.
You can have whole life products that struggle to make 1-2% over 20 years and then you have some that regularly hit 5%-6% over their 20 year targets with great liquidity and guaranteed paid up in 6-10 years with no assumptions needed. Of course, there’s nothing wrong with putting your money elsewhere either…
…it’s just that…on the face of it, a guaranteed death benefit, guaranteed cash value, and an IRR net of fees and commissions of between 5%-6% that can be accessed tax-free isn’t that bad. I use those types of contracts regularly, but I won’t make you eat the illustration.
I’m an independent broker so I’ve seen both sides of the issue. Permanent plans don’t always work. However, I’ve seen more BTID ideas fail for clients who bought into A.L. Williams philosophy back in the ’70s – even when they did save the difference.
Well, that’s just it, your statement is very open ended. My point is, and has always been (if you take the time to read related articles) that when you compare apples to oranges, anything is possible. And, that’s what the popular vision of BTID does.
You don’t need to see any illustrations from any whole life company to be able to make a fair comparison between investment strategies. After 30 years of investing, it’s also easy to get an effective rate of return before taxes of 5%-6% on the BTID side, even when you started out with a 10% return net of fees – even with dirt cheap term rates. Just add up the total of the contributions made over your typical client’s time horizon, add in what they paid for their term or UL contract, and compare it to the cash they get back.
But, when you compare a financial product that derives its interest from bonds (whole life) and then compare it to another investment that derives its interest from equities, I can guarantee that I can beat any of your assumptions at a cheaper “cost” by simply changing the risk profile – like you did – for the hypothetical client and beat your mutual funds with stock options, and we could go back and forth all day long.
You can make the ROI look even better by including the cost of insurance on the whole life side (as it can’t be deducted anyway) and excluding the cost of insurance on the BTID side. I’ve seen Dave Ramsey do that on numerous occasions, though he doesn’t tell his audience that.
I’m not saying it’s not possible to do better than a whole life contract, I’m saying that – apples to apples – it’s a challenge. And, when people make broad sweeping statements like “whole life is a waste of money”, I know that there wasn’t a lot of hard thinking put into that statement, because it truly depends on the rates you’re getting, the economic environment you’re competing in with your alternative, and whether or not you are making an honest comparison.
But, then again, at this point I’m shooting in the dark a bit without knowing what your investment strategy is.
Well David, you’ve got assumption written all over that. You assume I haven’t put much thought into this subject over the last 30 years. It is a blanket statement and even you admit that a person can do better than whole life, so the only area we disagree in is how much better.
And excuse me David, but if you factor in the entire term premium I’m pretty sure you’ve gathered up and accounted for the cost of insurance. Guess you weren’t in the same math class as Dave Ramsey and me.