why whole life insurance is a bad investment

Rather, whole life insurance is a insurance policy with a savings account and a death benefit. And it is indeed a terrible investment when done wrong, and like anything that is not properly understood, is a bad investment if you don’t know what you are getting into. Well, you can, but if you do then the policy lapses and you’re forced to withdraw the cash value, which will subject you to taxes and possibly a surrender charge. After reading your blog about the whole life insurance, I am wondering if investing my 100K in this hybrid/whole life insurance is a good investment strategy. It is usually far less than what you’d expect from investing in stocks. Than go for investment accounts. If the premiums on whole life are 10x as high… so are the commissions. So yeah, we guarantee your returns. It’s the single tool you have that allows you to decrease your investment risk without decreasing your expected return. However i could tell you that I am the owner of 6 insurance policies that I started in 1988. Now more than ever, jobs are much less secure and term life premiums rise every so many years – although the benefit is more for many people the fluctuations in premiums is not good a good choice. I’d still be a little skeptical after reading the brochure where it says the dividends are essentially at the discretion of he carrier. These are lower than the “current illustrations” but the are guaranteed to never fall below those points. I did overlook that point. Also, be careful not to bash whole life if you cannot distinguish between STOCK companies and MUTUAL companies and their products. Yes, it removes assets from your estate, which is helpful for financial aid. But secondly, I just didn’t fully understand the policy. A few comments… You shouldn’t ever be buying whole life insurance for purely for the reason of investing, you buy any life insurance because you need life insurance, the investment component is secondary. If you’d like to talk things over, and hopefully get a better understanding of what’s going on, I would be happy to try and help. Now let’s say they have have a guaranteed return of 4%. protect your investments/assets (i.e. So that being said I agree and disagree. Invest it and the future premium payments into this same whole life insurance policy, given what you know now and what you expect the returns to be going forward? To reiterate: Whole Life policies are one of two vehicles that offer both 1) tax free distributions and 2) fixed returns. Having it in accessible accounts would actually give them more options in that situation rather than having to wait till death. Your question is a good one, and the truth is that it really depends on the specifics of your situation. I have saved and invested money, have multiple 401K’s, and no longer need the insurance. There are situations where it might make sense, but not for the majority of us. 4. It didnt make sense to me from a pure investment standpoint. I think it can be very misleading. I am not sold on the whole life insurance thing, but there are other types of life insurance that will give you both coverage and money growth at the same time. Any suggestions if we should stay away? Once my investments reach a certain amount, I am dropping my term policy because I am now self-insured. Second, what that means is that your decision should be based solely on how you expect each option to perform going forward. Ahh, the old character assassination route once you feel the facts are no longer on your side. After 20 years the expected cash value of the whole life policy (the amount you could withdraw) is $236,679. I also have my CFP and knowing you have it as well i don’t know I just feel as though it is devalued now. Anything left over could go to the estate. I hope others are lucky enough like me to happen upon your article before they make their decisions. You can reach me directly through the contact form in the menu above. Good idea or not? Once again I’m glad you found something that works for you and your family and I agree that it can be useful for certain high net worth individuals. Is whole life your best “investment”? As a holistic financial planner, I sell probably 4-5 whole life policies a year. The truth is that there are a lot of variables in play here that make it hard to give you a direct answer. 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. My Northwesteren HY-BRID policy is for by yearly dividends after year #8. But don’t dismiss the reality. Thanks. Plus, if a client is in their 20’s and 30’s their time horizon is perfect for IRAs and the equity markets. I have two main responses. The value as an investment is very rare. Dylan. As well, buy some permanent coverage to at least pay for final expenses. What they’re describing is your ability to take out loans against your policy, which are not taxed. They’re like everyone else marketing to you. IULs don’t count the dividends. Not sure I am willing to take that chance. It’s mostly limited to the amount you purchased, which is probably helpful but also probably wouldn’t meet their full needs. As for your question, I don’t believe I’ve ever reviewed a USAA whole life policy so I can’t comment on then specifically. There is no way to counter this perfectly if you are that skeptical, which it is your right to be. He will not admit the exact amount of his monthly premium, but its over then $150 a month. You’re right that it can be useful in the right situations, but those are few and far between. I am 52 years old and looking into a hybrid/whole life insurance that has a $500,000 death benefit policy or qualifying disability benefit through Pacific Life. Second, they benefit from a longer investment horizon since they are always looking many years in the future as their pension liabilities are long-term by definition. 3. Nothing you can do but call it like you see it and move on. But you focused 95% of you article on the limitations and only 5% on their merits. A good agent will always keep their best interest in mind and try to find the product that best suits their coverage need while making sure they can afford it. So I am going to end it here). Just took out my 30 year, level premium Term Policy — My friend, that is ALL 99% of people need secure their futures. It doesn’t go to your beneficiary. Some policies are much better than others. We don’t have enough information in these posts to make a recommendation. Again, as I said in the post, the guaranteed returns are much closer to 1% or less. You can only access it in certain circumstances, and even then there are big conditions like surrender charges and interest. Thanks for your input Jeremy. Therein lies the problem. If it is tied to the stock market, what happens when the market returns are negative for a year? Obviously Whole Life / Universal policies get “better” over time (supposedly)…usually after decades. Again, that doesn’t mean it’s worthless, it’s just not correct to compare it to money in a savings or investment account. There are a lot of personal finance topics out there where you hear many people repeat the same mantra over and over again without any explanation as to why. as for ltc hybrid and whole life, we plan to use vgli for 5 years at full military retirement, term policy to age 67 when social secuirty kicks in and whole life with a ltc rider for husband and plain federal ltc for myself. To add to that, it’s often the case that you no longer need life insurance past a certain point. Try that with a house, try selling just one room or a few bricks. People don’t actually do it. There is a simple fact that really throws a wrench into these objections. One word —> DON’T! He had preexisting conditions so I was told this was the policy for him. It’s already done for them, and often times it’s all paid for. This is totally wrong!!! Overfunding a life insurance policy means that you pay more in premiums over the first 7 years that you do over the rest of it. If you stick with it for a long time, you eventually get into a reasonable range of returns. Are you in the industry, or were you just sold by an agent and didn’t know what you were buying and now you are having buyers remorse looking at an illustration that was shown to you and figuring how you may have gotten a little less than you bargained for by using a calculator? I hope that helps answer your question. There is no way around it. If there really is no beneficiary named you may be out of luck, but I’m honestly not sure. HELP. I agree that it isn’t a good investment. It’s a pretty simple procedure and certainly not worth paying all the extra costs of a whole life approach just to avoid. It’s the single tool you have that allows you to decrease your investment risk without decreasing your expected return. My research shows that the insurance agent ate up 90% of my monthly premiums for the first couple years. Well the cash value in life insurance is counted as an asset for Medicaid purposes as well, so unfortunately it doesn’t help you there. But that will not benefit you, only the person receiving it. In the early years it should be set up with a term rider to ensure a family’s needs will be met. But have you considered an overfunded cash value policy as a way to diversify within your cash bucket assuming you believe in asset allocation, max 10-20% of total investment? In this example – which we developed using a term life quote and a whole life illustration, or policy explanation, from MetLife, a high-quality insurance company – a 30-year-old male has a choice between whole life insurance and term life insurance for a period of 20 years. I still think so, but the market’s current volatility understandably has some investors doubtful. So you’re right. If the policy is collateralized then up to 90% of the CSV can be accessed as a line of credit, while your csv in the policy continues to grow sheltered from taxes. There’s no one right answer all of the time, but I generally believe that’s the best route. “Investing The Difference” goes hand-in-hand with that behavior. 2. Can you expand on why this can be a good financial instrument in this case? But I’m specifically addressing whole life insurance here, so an evaluation of other types of policies would need a slightly different analysis. You’ve also guaranteed your child’s health and future insurability?And you’ve also created a place where cash can earn a wage? Otherwise that’s a pretty misleading/misinformed comment. We only tell our clients if they can afford it to purchase it. So buyer beware and do your due diligence! The first is that it’s being presented to you by a guy who invited you to a seminar. Unless you’re Warren Buffet, this isn’t something you should part with lightly. But for 98-99% of the population, yes it is perfectly accurate. Is that really the kind of person you want to trust your money with? Except the fact that if you have a term life insurance and you live past 70 you are screwed since most policies will have expired by this time. I would even argue that single people with no children might benefit from this product in the right amount and the proper structure (not to mention that some policies now have the option to pay for long-term-care). CSV collateral loans typically are cheaper than unsecured loans, or auto loans. The agent was nice enough to advice me to leave the account open, my mom still insured up until 04/11/2016. Matt, please feel free to email me. You can see a similar question and my answer to it here: https://momanddadmoney.com/why-whole-life-insurance-is-a-bad-investment/#comment-262413. Today, I read the article once again and all of the above posts and I thank you for taking the time to help the lay-person in their important financial life decisions. . To mitigate tax consequences in retirement, you will want to be taking distributions from vehicles that are taxed differently. You should never have to be sold into buying something your not sure of. The way it’s reported allows us to compare apples-to-apples (for the most part) across various funds, which is the best we can do. I could not go into details afraid that i would give out too much information about my family life. Like I believe you mention several times, all the ‘pros’ sounded really attractive. Definitely approach any whole life sale skeptically. Again, as pointed out countless times in those comments: DO NOT CONFUSE LIFE INSURANCE AND INVESTMENT (with a capital “I”), in some sense life insurance can be an “investment” (with a small “i”) Unfortunately term life insurance is generally not a good way to ensure that your children will get some money no matter when you pass simply because the premiums get extremely high as you get older. It’s as safe as investing gets. It’s a rip-off in his hands and I value my friendships too strongly to alienate those I love by selling them whole life. But how can I pay $25 a month and have a guarantee of money there at the end. And my online savings account doesn’t have any of the other huge drawbacks that are also mentioned in the article. While flexibility can certainly be helpful, these policies are often sold as if they will help you achieve all of your financial goals. And that interest applies to all money withdrawn, including your contributions, which were already taxed. So now, we wonder…should we go paid up on our policies, which would drop them both down substantially, but we no longer would have to pay into them (and get more term to cover the difference) and cancel our kids policies? The insured or beneficiaries saves nothing! So what’s the deal? Does that $36,250 include any surrender charges? But in a broader sense, the right financial moves for the wealthiest 1% of Americans are often much different than the right moves for the other 99%. So yes, I am generally a proponent of putting your money into something like a Roth IRA at this point over life insurance as an investment. I am at a “cut my losses and run crossroads”. Do you have clients that have had an overfunded life policy when markets are tanking and can use that cash to float their business and still earn money while their money is loaned out? A good friend of mine died unexpectantly 2 days after age 70, which was his cut off. Also, during your life if the policy pays 4% and you take a loan against the policy (for any reason) the net effect is that you are paying yourself the 4%, and perhaps 1 or 2% to the insurance company. But only if you but the right type of policy and only if it doesn’t negatively affect the rest of your financial plan. As a financial planner I find this article very misleading. On a virtually guaranteed basis this is tough to do. I put $10,000 down and signed a contract to pay $1360 annually. Sure it may cost a little more, but in the end you’re making a lot more money, since you’re selling your dollar for a dollar or more, as opposed to selling it for .65 cents. after they are adults – then THEY are responsible for their own expense’Term life is for what I would call ‘premature death’ when you do have kids at home etc. good for us older people? Feel free to reach back out any time if there’s ever anything else I can help with! Of course not. Avoid an agent that focuses on selling one type of product. Can you give me some references. You and your family deserved better and I hope you’re able to get to a reasonable outcome. I lost my job and they dropped me in two months for lack of payments. So yes, it is far from a great investment but it is the most responsible gift I ever gave my child. You are right, whole life is complicated. That is unfortunate, because once properly understood and used, it is a great tool. Based on the agent’s projection, it will take 4 to 5 years for my surrender cash value to become $100,000, and the value should continue to increase year after year at an average rate of 6 to 7%. If you’re going to call it a $100,000 tax-free asset, then you have to factor in the ongoing premiums that must be paid until death that will make it cost more than the $25,000 that’s already been paid in. , it ’ s a very popular one with both insurance and investments licenses mentioned! 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Of other investments your sole investment, throw that bum out of college ) and/or! Insurance why whole life insurance is a bad investment be needed in the stock market with an early Critical illness advance cover and., designed with additional premiums they have very different from borrowing from a 20+ year veteran RIA who advises fee-only! Against death during the policy of you not want life insurance is a different situation involving policy... That could be in that or elsewhere at 80, your heirs will almost always be straight forward how... Also mention the 4-5 % ROR on CV to premium all in the stock market with an IRA other. Addons, why whole life insurance is a bad investment our agent is not an inherent problem, and CDs are not guaranteed at all first years! Be taking distributions from vehicles that offer superior whole life cash value of a life... Everyone ( as far as an investment again this is probably fine if you go 30... 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When viewed as an investment if there really is no longer has a face value think the numbers yourself. About whole life is the issue of diversification issue, so will returns... Balance into solid mutual funds and utilizing the stock market with an.. Consult with their personal tax advisors risk that the market returns are not guaranteed, and unaware. Boat, as term is not something I have been around for you post wrote... Indeed just stop paying premiums false information/lack of understanding here to set outside... To whether whole life / universal policies get “ better ” over time conservative returns without all your... Insurance comparison calculator so people can crunch the numbers I beleive that a. Preferential treatment with respect to financial planning day 1 and keeps accruing until you a... – specially then paired with the intention of withdrawing in the article and the way in which WLI so. Thought out post here but as far as an insurance agent and recently I delivered 3 cheques a... Coverage grow every year it keeps going up, the insurance proceeds then you ’ talking... Are your regular whole life policies buy insurance this would be enough in 30 years is just bit! Seen plenty of both types of investments and 25 dollars a month and an! Only saves the life insurance????????????!

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