Why not Whole Life?

[butler]

My wife and I are thinking of getting whole life insurance. Online opinions are at both extremes. People either whole-heartedly recommend or absolutely hate Whole life. I am looking for specific reasons why is it a bad idea. I will appreciate any inputs, comments --- both negatives and positives.

Our situation:
Both of us have term life through our employers and we have taken additional coverage on the policies. We are in early 40s, making about $330K a year combined, maximize our 401ks, have about 50% equity in our primary residence and about 70% equity in rental unit thanks to this crazy Bay Area RE Market (both properties are in heart of Silicon Valley). We have no other debts, just one daughter who is starting Kindergarten this year and we have a 529 for her. We have decent non-retirement savings, mainly in ETFs and some individual stocks.

Why Whole Life:
We are looking for additional investments beyond 401ks and non-deductible IRAs for our future. Wife wants to quit in another 7-8 years. Idea is to get whole life and use the funds in retirement. If we don't need the funds then pass the value to our daughter.

Thanks!!
-Butler

[kork13]

1) Life insurance is for when you're dead -- it's not an investment.
2) The insurance salesman will tell you all these promises about "guaranteed return" and "tax free growth" and "use it like a bank account" and so on. It's all a pack of half truths or outright lies. Myriad examples of ACTUAL returns all tell the story that you earn far less than they promise, because ....
3) They charge you fees like you wouldn't believe, and it's all hidden within your massive monthly policy premiums.
4) Have I mentioned that the people who handle & encourage you to buy these insurance policies are salesmen? They aren't looking out for your financial well-being, they're looking for the sale. They are not fiduciaries, and have no obligation to look out for your best interests, and they won't. They typically earn roughly half of your first year's premiums in commission, so the larger the policy they can sell you, the better. They're no different than car salesmen -- they're sharks.
5) Any withdrawals you make reduce the value of the insurance payout if/when you do actually kick the bucket.
6) If you take whatever your monthly premium would be, buy an equivalent term policy (say for $1M), then invest the difference, you'll come out WAY ahead, even after taxes (long term capital gains help even more).
7) If/when you see the light & realize you've made a huge mistake, they will charge you outrageous surrender fees just so you can get half of your "cash value" and stop paying thousands each month for a bad insurance policy.

I could go on, but it's late... Others will certainly have more comments. But please, for your own sake, and for your family's financial well-being, please do something else with your money. Invest it, buy a second rental property, feed an HSA (which *DO* serve as a great option for additional tax-advantaged savings space), or shoot... buy lottery tickets -- if you're going to burn money, at least get some enjoyment out of it.

[corn18]

It's all about th fees. They charge you a lot for your"investment" compared to a low cost index mutual fund. Buy term life. Invest your extra money in something else. I have a taxable account with low cost index funds. Mostly us and international to keep the taxes low. I do have some muni bonds in taxable but they are the tax free variety. Very tax efficient.

[disneysteve]

Why Whole Life:
We are looking for additional investments

First, you'll notice that this thread has been moved from the Investments forum to the Personal Finance forum.

Why? Because life insurance IS NOT an investment vehicle. That alone provides the simple answer to your question. If your goal is to find "additional investments" you are looking in the wrong place if you are considering whole life.

kork13 gave a nice concise run down of why you want to avoid whole life at all costs.

We've had a number of discussions on this topic in the past. Rather than rehashing it all again, here is a link to a good thread on the topic: http://www.savingadvice.com/forums/p...insurance.html
Read through that and if you still have questions, we're happy to answer them.

[disneysteve]

Both of us have term life through our employers

I also want to comment on this. This is a very common mistake that many people make. It's fine to have coverage through your employer. I've got 2x income through mine. But that should NOT be your primary or only life insurance because it is tied to the job. Leave/lose the job and you lose the coverage.

Term life is dirt cheap, especially at your age. Rather than buying extra coverage through them, get your own independent policies. Use Accuquote or a similar service to find the best price. You have high incomes so you need substantial coverage. 8-10 times income is the rule of thumb. Keep the basic work policy as a bonus but make sure your needs are covered with your private policy.

[snafu]

BTW, in some instances employer's term life policies can be continued after leaving employment as long as you pre pay the monthly fee on an annual basis.

[Captain Save]

My wife and I are thinking of getting whole life insurance. Online opinions are at both extremes. People either whole-heartedly recommend or absolutely hate Whole life. I am looking for specific reasons why is it a bad idea. I will appreciate any inputs, comments --- both negatives and positives.

Our situation:
Both of us have term life through our employers and we have taken additional coverage on the policies. We are in early 40s, making about $330K a year combined, maximize our 401ks, have about 50% equity in our primary residence and about 70% equity in rental unit thanks to this crazy Bay Area RE Market (both properties are in heart of Silicon Valley). We have no other debts, just one daughter who is starting Kindergarten this year and we have a 529 for her. We have decent non-retirement savings, mainly in ETFs and some individual stocks.

Why Whole Life:
We are looking for additional investments beyond 401ks and non-deductible IRAs for our future. Wife wants to quit in another 7-8 years. Idea is to get whole life and use the funds in retirement. If we don't need the funds then pass the value to our daughter.

Thanks!!
-Butler

I will probably be the only one who has something positive to say about it ... and yes of course I sell life insurance and I'm proud of it. I'm actually surprised you see anything positive on it online. I can go on about it but I"m going to try to keep it as short as possible.

Sounds like you got the basics covered , you save a whole lot and I would assume you have an emergency fund. You have quite a bit in equities and you're looking to diversify with life insurance. Life insurance does not have the high potential returns that stocks do but it does provide a safety net during retirement. Obviously I don't agree with folks who say you can't put money in WL for retirement .. but I also don't agree with agents who think everything has to go to WL. I think having both gives you a lot more flexibilty in retirement. and having WL as part of your portfolio can allow you to be more aggressive elsewhere.

For example ... Let's say you were to retire at an inopportune time right before the 3 down years in the stock market in the early 2000's. you would have to pull money out of stocks that are already sinking so if your stock is down 15% , taking money out would compound the loss. You can probably survive that, but the problem is the following 2 years, your stocks keep plummeting .. and you keep taking money out. So not only are you losing money , you most likely don't have a peace of mind at this point and you're supposed to be retired and enjoying life. you can decide to change your lifestyle and move more to bonds but then when the market picks up the 4th year , you are not making up the ground that you lost because you turn to safer investments.

This is where Whole life can be a solution ... Your value would go up every year based on a guaranteed interest rate + a non guaranteed dividend rate .. so you would always have money to pull from wile you wait for your stocks to pick back up.

your ceililng def lower than stocks, but you have no principal risk in retirement, provided you had started 15-20 years prior. You said your wife wants to quit in 7-8 years. If your whole life policy is designed for cash accumulation, that would be about the time you would break even. It would not be ideal for accessing cash value. but it's not knowing that in year 18-20 , you can conservatively be at a 4-5% IRR that will continuously grow.
Whenever your value goes up, your new principal is protected , it can not go back down .. and you know every year you will get a percentage and most likely get a dividend rate. The companies that excel at this have paid dividend every year for over a century.

Another thing is , a lot of of life insurance agents talk a good game but have no idea how to design a WL properly for cash value accumulation

Here is an example of someone posting their Life insurance policy that was designed for cash accumulation

Scroll down to the guy named Actuary who posted his policy

https://www.bogleheads.org/forum/vie...50626&start=50 (funny how the posters have no clue what they're looking at , even their "expert")

Now it's important to note that this was done in the early 90's in the high interest rate environment .. Dividend rates were a lot higher back then. he broke even in his 2nd year. One thing I like about Whole life illustration in this day and age it's that they're very conservative because of the low dividend rate, once interest rates rise, the dividend will rise as well (not immediately)

Finally for Whole life specifically, there are only a handful of companies you should look at - Mass Mutual, Penn Mutual, Guardian life are the top 3. Ohio National , Northwestern and a couple of others can be used for niche siutations. .. Those companies have a ton of cash in surplus meaning they have a ton of money to pay the life insurance policies. They are mutual companies so you are actually part owner and if they HAVE to pay you a dividend ... so it's in their best interest to pay you dividends.

one last thing because life insurance cash values are more liquid than qualified money , you have access to it and you can use it as secondary emergency fund. You should still have emergency fund in the bank but let's say you like to keep a 9 month emergency fund, you could reduce that to 4-5 months if you'd like and invest the rest.

I would suggest you not to rush .. feel free to learn as much as you need to about it .. learn what it means to be designed properly before buying .. any counter argument of the other side has , you should grill your insurance agent about it and see how he responds. Feel free to reply to this post as well. There are some people I respect who speak on the topic ... I was told not to post their links here .. feel free to PM me if you want to learn .. .they have countless blog posts, articles and podcasts on it.

There are other benefits.. but this post was long enough

as far term life goes.. there's a good chance you might still need some with the WL .. because in order for the WL to work well for cash .. your death benefit needs to be as low as the IRS would alllow (as someone else said .. something other than your employer)

[Captain Save]

First, you'll notice that this thread has been moved from the Investments forum to the Personal Finance forum.

Why? Because life insurance IS NOT an investment vehicle. That alone provides the simple answer to your question. If your goal is to find "additional investments" you are looking in the wrong place if you are considering whole life.

.

Here we go with the word "investment" again .. FINRA wanted to own that word so they can charge their advisors a membership fee and now DIYers are playing right into their hands.

what constitutes an "investment" .. keep in mind that the invesment section has CD"s as an investment (wich I don't disagree with"

I can invest in a van (a depreciating asset) but it makes more money .. it was well worth it. Is that not an investment.

[Petunia 100]

My wife and I are thinking of getting whole life insurance. Online opinions are at both extremes. People either whole-heartedly recommend or absolutely hate Whole life. I am looking for specific reasons why is it a bad idea. I will appreciate any inputs, comments --- both negatives and positives.

Our situation:
Both of us have term life through our employers and we have taken additional coverage on the policies. We are in early 40s, making about $330K a year combined, maximize our 401ks, have about 50% equity in our primary residence and about 70% equity in rental unit thanks to this crazy Bay Area RE Market (both properties are in heart of Silicon Valley). We have no other debts, just one daughter who is starting Kindergarten this year and we have a 529 for her. We have decent non-retirement savings, mainly in ETFs and some individual stocks.

Why Whole Life:
We are looking for additional investments beyond 401ks and non-deductible IRAs for our future. Wife wants to quit in another 7-8 years. Idea is to get whole life and use the funds in retirement. If we don't need the funds then pass the value to our daughter.

Thanks!!
-Butler

By this, do you mean you are making non-deductible traditional IRA contributions? Are you also converting them to Roth IRAs?

Do you have a taxable investment account? That's a great place to park some of your money. Choose which investments you will hold here carefully. If you invest in foreign stock funds, they are a great choice for your taxable account.

[disneysteve]

I can invest in a van (a depreciating asset) but it makes more money .. it was well worth it. Is that not an investment.

I think we need to separate business from personal. Yes, if you are running a business, purchasing a van or a piece of equipment that will allow you to increase sales or production is a type of investment, but when most of us speak of investing, we're talking about our personal finances. Remember, the title of this forum is Personal Finance, not Business Finance. That's an entirely different topic. I'm sure there are websites devoted to that topic but this isn't one of them for the most part, though some business discussion do crop up, such as in the Real Estate forum.

[Captain Save]

I think we need to separate business from personal. Yes, if you are running a business, purchasing a van or a piece of equipment that will allow you to increase sales or production is a type of investment, but when most of us speak of investing, we're talking about our personal finances. Remember, the title of this forum is Personal Finance, not Business Finance. That's an entirely different topic. I'm sure there are websites devoted to that topic but this isn't one of them for the most part, though some business discussion do crop up, such as in the Real Estate forum.

so where do CD"s fall in that category?

[disneysteve]

so where do CD"s fall in that category?

CD's are typically a form of personal savings. They generally pay more than regular savings accounts since you're tying up your money for a defined period of time.

I'm not a business person so I'm not sure if business owners utilize them at all.

[Nutria]

CD's are typically a form of personal savings. They generally pay more than regular savings accounts since you're tying up your money for a defined period of time.

I'm not a business person so I'm not sure if business owners utilize them at all.

If you're business has lots of extra cash, then it's definitely reasonable for the "finance guys" to put a chunk of it in CDs instead of a savings account.