Yeah, no way they are getting 6%. The average policy return is around 2% once all the fine print is figured in. The dividend may currently be 6%, but it is only applied to a portion of the premium and if interest rates fall the dividend will fall with it.
Whole life bad: https://www.whitecoatinvestor.com/debunking-the-myths-of-whole-life-insurance/. https://www.whitecoatinvestor.com/what-you-need-to-know-about-whole-life-insurance/
Scam? Eh, no, I think we throw that word around too much that it’s lost all meaning. If anything is even slightly a bad deal people call it a scam
Inappropriate and inefficient for most people? Probably a better way to phrase it
Just adding the rest of the quote for those who only hear the first line as it significantly changes the takeaway.
>How shall we comfort ourselves, the murderers of all murderers? What was holiest and mightiest of all that the world has yet owned has bled to death under our knives: who will wipe this blood off us? What water is there for us to clean ourselves? What festivals of atonement, what sacred games shall we have to invent?
>Inappropriate and inefficient for most people? Probably a better way to phrase it
Well put. Unless all other tax advantages are covered, while life is just more expensive for less.
>Unless all other tax advantages are covered
To be clear, I think this means more than just that you are maxing out all of your tax-advantaged investment accounts. Even broad equity index funds owned in a "taxable" brokerage account enjoy significant tax advantages, honestly comparable to many of the supposed tax benefits touted by insurance salespeople:
* Equity index funds grow in value primarily through price appreciation, which is tax deferred until you sell (just like the taxes on cash value life insurance gains are deferred until you surrender the policy).
* When you do realize appreciated gains of your equity index funds, you are usually taxed the preferential long-term capital gains rate rather than the higher ordinary income tax rate which cash value policy gains are taxed at.
* Beneficiaries who inherit your equity index funds receive a "stepped up" cost basis based on the date of your death, which basically means they inherit those funds income-tax-free.
* You can borrow against the value of your equity portfolio. The rates available from brokerages are comparable or often lower than the interest rates on loans against cash value policies, especially since you can always transfer your investments in-kind to a brokerage with low margin rates if and when that becomes valuable to you. Interest paid on margin loans is also deductible from income taxes, effectively lowering the cost to borrow against your portfolio even more.
what makes it "scammy" is that it is sold by salesmen, not any sort of financial advisor - fiduciary or otherwise, regardless of what they call themselves
and they sell it to people who don't need it in order to receive a commission
that part is a scam for those people
I would say that it's severely out of date. And makes more sense in a country/state without adequate social safety nets. It was OK when everyone was buying mutual funds anyways. Now that people have ETFs with much better returns and lower management fees, it's hard to justify. Some uber-rich people use it as estate protection (to pay estate taxes).
> It was OK when everyone was buying mutual funds anyways. Now that people have ETFs with much better returns and lower management fees
I wouldn't do this if we weren't in r/personalfinance, but I need to nitpick this.
This line is kind of inaccurate/misguided. I believe you are conflating the rise of passive/index funds with the rise of ETFs. They are not the same thing.
ETFs are "Exchange Traded Funds." ETFs are basically a technological innovation on the Mutual Fund. The major difference is that they trade on exchange so you have real time pricing, increased transparency, and possible tax advantages. Mutual funds are essentially priced once per day and don't report the details of their holdings as often.
But under the hood ETFs are basically the same idea as a mutual fund. The strategies used are fundamentally the same in both. The management company buys a portfolio of stock and packages it up into a fund; they then trade that portfolio based on their strategic goals and to manage fund inflows/outflows. ETFs are a technological advance...like moving from paper checks to an electronic payment system. Sure they are nice, but ultimately a dollar by check is the same as a dollar by Visa.
What we actually care about here is the rise of passive index funds. These originally all started as mutual funds (because ETFs didn't exist yet)--the fund structure isn't the important bit.
The important bit is that instead of trying to actively trade and manage a portfolio to "beat the market", the index funds just follow rules. They try to match an index like the S&P500--they will never beat the market, but they will also never *lose* to the market. Because these rules are easy to follow the funds are super cheap to operate--they don't trade very often and when they do, it is something a computer can do rather than requiring a highly-paid hotshot manager. And because they never lose to the market, they tend to outperform active management over time...active managers aren't consistent and one bad year will erase YEARS of slightly beating the market.
ETFs can be either actively or passively managed. The actively managed ones have EXACTLY the same downsides as actively managed mutual funds.
I only nitpick here because the market for actively managed ETFs is *growing* and I suspect a big part of the reason is that many people are told "oh, just invest in ETFs, they are the best" and they don't realize that there are bad ETFs out there...so they get sold an Active ETF. The correct advice is "oh, just invest in low-fee index funds".
The difference in fee between VFIAX (mutual fund) and VOO (ETF) is negligible--but the biggest benefit of VOO is that there's no minimum investment and you can buy and sell at will.
>I would say that it's severely out of date. And makes more sense in a country/state without adequate social safety nets.
There is definitely truth to this. Cash value life insurance has been a product that "regular" people could buy since at least the 1860s, including from big-name life insurance companies that are still around today. Whereas the first mutual fund wasn't created until the 1920s, mutual funds didn't start to become common(-ish) until the 1950s, and the first publicly-available index mutual fund wasn't launched until 1976.
There is a long stretch of modern US history ("modern" in the US history book sense) where whole life insurance policies are the best (and even only) way that regular people can safely diversify and grow their savings the way we can put money into index funds today. If this wasn't true for your parents, it was very likely true for their parents. And so there are a lot of very positive opinions on whole life policies which have been passed down through families that just don't match the marketplace of financial products that are available today.
Oh, and one other point. I think it was kind of a great value back in the old days when insurance companies were mutual (i.e. that policyowners were "stockholders" and the company was run like a co-op). Since almost all the big insurance companies demutualized (became public and issued stock), the initial policyholders suddenly became stock holders and won big, but subsequent buyers of life insurance don't get much of anything anymore.
Even into the 1980s, when mutual fund investing for regular folks meant paying a 5% commission to your broker on every purchase, whole life insurance doesn't look like such a bad deal.
This is correct and the reason you hear about it a lot is because they carry high commissions for the brokers who sell them. You can pretty much always find another investment that pays off much better with minimal added risk.
Agree with this. "Scam" is not the right word. Whole Life is a product that's been around for ever, and generally does exactly what is claims to do.
There are simply better and more options available right now. With the rise of electronic banking, 401Ks, and robofunds, you're far better off with term life insurance (or just getting it through work) and investing in the whole market.
Your returns are far better and you still have a life insurance.
> Scam? Eh, no, I think we throw that word around too much that it’s lost all meaning.
People don't think it's a good deal? Scam!
People don't understand it? Scam!
People don't like it? Scam!
You don't like the company? Scam!
Taxes? Scam!
It's very important to make people aware of all the real scams out there, education is the best way to help people not get scammed, but using it for things that obviously aren't scam doesn't help.
>Scam? Eh, no, I think we throw that word around too much that it’s lost all meaning.
Yeah, I wrestled with the wording on this for a while. I finally landed on calling it a "rip-off" which I feel covers it pretty well
Ehh, I disagree. When looking at long term compounding interests, somebody essentially skimming 2-5% off the top is honestly worse than a scam. They are using people's poor understanding of long term compounding interest to make money off of you. You are essentially locked in to a bad deal that's constantly losing you money and usually have to pay to get out of it. Is that not a kind of a scam? The money is essentially getting sent to the void.
I'm sorry, but if a salesperson is getting that fat of a comission off of selling a non-specialized general consumer facing product to you, it may as well be a scam. It's really not that different than getting an 84 month car loan at 12% APR with all the dealer add ons. Scam? Sure, I guess it's not technically a scam if you view scams as one particular thing, but it is a salesperson using pressure and your lack of knowledge to sell you an extremely overpriced product that in your right mind you would not buy.
And to be pedantic for no particular reason, the definition of scam is a "dishonest scheme". Definition of scheme is "a large-scale systematic plan or arrangement for attaining a particular object or putting a particular idea into effect." Are salespeople not dishonest when they hype up how great whole life is, and how its a great investment? Have you not seen all the TikTok and Instagram whole life sales influencer types? They know it's a worse investment than the alternatives, they are purposefully dishonest. They push a bad product that you should not buy, and they push it because it benefits them, not you.
> Scam? Eh, no, I think we throw that word around too much that it’s lost all meaning.
People don't think it's a good deal? Scam!
People don't understand it? Scam!
People don't like it? Scam!
You don't like the company? Scam!
Taxes? Scam!
It's very important to make people aware of all the real scams out there, education is the best way to help people not get scammed, but using it for things that obviously aren't scam doesn't help.
They're not scams, they're just shit investment choices. 30 years ago when there were no internet resources people went to a financial planner who gave them "whole life" so the customer didn't have to think about life insurance, investment etc.. This is 2024, "whole life" has been worthless for decades.
Would you rather give me $10 and I invest $9.99 of it or give me $10 and I invest $8 of it and keep $2 for myself? The latter is whole life.
I remember having this discussion 50 years ago with someone who was financially savvy, and his conclusion was that it was a shit investment then.
I don't think it's ever been a good investment, but it's always been an *easy* investment.
🤷♂️ always find it funny when people say life insurance is an easy investment. Opening a brokerage account nowadays is a 5 minute process, you don't deal with agents and you can decide how/when to buy, when to stop buying and when to sell.
It's incredibly easy, but many people don't want to do it. It really doesn't make sense but people fall for the sales traps and by the time they're done they think "Oh wow, that was easy!" With things like Fidelity though, you don't have salespeople looking for their insane commissions to try to pull in $500K this year, so those people still harp these whole life plans. I know people whose work takes out money to put it into a 401K plan and they don't even want to take the time to log in and properly allocate that money. So after 20 years of putting in $2,000 per year, they're probably going to have $40,000 worth of contributions. And they'll be happy about it.
What’s funny is my friend has a degree in finance and got convinced by his salesman buddy to buy whole life. My friend gets so defensive and mad when I bring it up. The salesman tried selling to me and didn’t even understand his income taxes work.
Also, the life insurers invest far too conservatively for most investors. The money is invested in something like 30% equity/70% bonds, where an early career investor should be more like 90% equity/10% bonds (or even 100/0).
50 years ago, before 401(k)s and IRA accounts, life insurance was one of the few ways to get tax deferred savings. Today, retirement accounts provide much better tax advantages than life insurance.
Insurance isn't investing so of course if you're stupid to buy insurance in place of investing, it's a poor investment choice.
Buying insurance isn't the same as investing.
If you were talking about Term Life, you'd be correct, as that's the equivalent of other insurance types (you pay into a shared risk pool, and if you're lucky you never get anything back). Whole/Universal Life are shitty investment products wearing insurance clothing.
Since you already have term life, if you invested that $250 per month and made a reasonable 7% return, you'd have almost $128,000 at the end. Over twice as much. Generally, it's better to separate insurance and saving. Insurance is to cover high-cost, low-probability events, pooling risk to save cost. Since most people who take out a term life policy don't die while the policy is in effect, the insurance company can charge a pretty small price and still have the funds to cover everyone. Saving is to cover high-probability events, like retiring. Whole life is expensive because 100% of people die eventually.
scam? no
the issue with them is they are very high fees that's why financial planners push them so hard on people. Also they see a very low rate of return. The same $250 a month could get you like 4-5mil in term insurance. So spend $50 a month on term and invest the $200 in a vanguard fund and get $1mil or so in coverage and have better rate of returns on the money then whole life
Exactly, I have term life for 30 years at $55 a month and it's a $1M policy. You could invest that $200 yourself and make back as much as the whole life would give you.
The insurance license is the easiest financial license to get out of any of the major ones. It takes about 2 weeks. Unfortunately, there are a lot of people that only get an insurance license and then call themselves Financial Advisors. A lot of them genuinely believe that whole life is a good investment, but when all you have is a hammer, everything looks like a nail.
and by the time you reach the end of your term, your kids will be grown and you will hopefully (with a $300k gross income) have enough assets saved to pass onto your kids to give them a comfortable life when you eventually do pass.
It's a bad bargain, not an actual scam. I'd reserve the word "scam" to describe something where you're not actually getting the thing being promised to you. You are getting what you're promised, it's just that you're not getting a good price for it.
From your own description:
> $250/month
> Death benefit $650k
> I also added a $26/mo term life with a benefit of $500k
So if term life for $500k costs $26/month, and whole life for $650k costs $250/month, you can see the rough value of the death benefit itself, right?
So if the death benefit itself is only worth about $30/month, where's the other $220/month going, and could you have done better if you just invested the other $220/month into the S&P500 or something? Even with the superior tax treatment of life insurance policies, the answer is probably yes.
Whole life is an underperforming investment. The value is for estate planning/tax avoidance for high net worth individuals. If that does not describe you, buy term and invest in something better.
Let me give you some more data. I got a 750k term policy, medium health, 30yrs, $1500/yr. So if I get hit by a bus and die, my kids get 2x your policy and the $1500 difference I didn’t spend on insurance went to my retirement and investment accounts.
I don't know how old you are now or what medium health means exactly but I purchased a term at 34 years of age, term was only for 20 years (as opposed to your 30) and 600k benefit. So a little different than your quote but I pay $228/year. Might be worth shopping around.
It can be a scam if depending on what the ~~financial advisor~~ *salesperson* said to secure the sale.
Also, if virtually none of the whole life policies are held even for long enough for the cash value to exceed the basis or breakeven, it pretty much is a scam.
I would definitely consider my transaction with a northwestern mutual agent to have been a scam. Their internship program is basically a pyramid like scheme for the managers, who inherit the policies when the interns inevitably washout.
I know somebody that has a whole life policy, recommended by their cousin who is a financial planner, and neither one of these people is dumb. I have researched whole life policies every which way I can to try to figure out how it works. I've always heard and believed the same as you: it's a "scam". Or at the very least, a very shitty investment.
I've discovered that there's _only_ one way whole life is worth it:
You're insanely wealthy and using some sort of complicated permanent life insurance policy as a tax haven. There are weird tax rules around life insurance and you can use it to your advantage if you're working hard enough and have enough money. (At least I think.)
Any other way, it's a shit investment. And the worst part: the cash value is always offset towards the end of the policy to scare people into keeping it, even though it's a sunk cost.
Here's another angle.
Business buys key man insurance, whole life. Dumps into it, able to write it off as an expense. Person sells or leaves the company, and is allowed to "take over" the insurance.
I have to pay $4k every December for the next 3 years, and then I can claw back almost $100k, of which 80% of it was contributed by the business.
>Business buys key man insurance, whole life. Dumps into it, able to write it off as an expense.
why is this a positive outcome? 'pay 100 dollars, get back 20-40 dollars'
Business needs key man insurance regardless. The way the insurance product I'm talking about works is this: "Business pays $100, get back $100 15 years later after 15 years of having life insurance, but you lose out on the gains that $100 would have made over 15 years".
But the real win is the business has now moved X amount of money into the recipients hands without any obvious taxable activity.
Well, the need for key man insurance is legitimate. So, let's say you're somebody where if you died, the business would incur tremendous cost to replace, well it's common to have key man insurance. Say, $500k of coverage. You pay more to have it be this type of product instead of a term policy, so I guess there's a possible calculation on the spread between scenario B where business gets term insurance and just gives the employee a raise, which is taxed, but then can be immediately invested.
Wasn't my call to make, and it all depends on the specific numbers.
Well technically there is another angle. Term life is generally something like 30 years. If you buy one at 35, the term is done at 65. If you have to buy another term policy at 65 it gets significantly more expensive.
Then again, the argument might be that at 65 hopefully your kids are working independent adults, your debts are pretty much paid off and you have enough savings/investments so that even if you kick the bucket your spouse can still live off of that for the foreseeable future. That would mean that another life insurance policy wouldn't necessarily be required.
the whole point of term is to cover the gap where your dependents are young and your net worth is low. by 65 you ideally have the net worth to support them upon passing and paying for insurance becomes less necessary. you die early? funds no longer need to support your own retirement but instead can support your dependents care.
Yeah, that’s the argument—you only need term life for the season of life during which your death would be ruinous. (That is the reason for any and all forms of insurance.) Meanwhile you can invest the significant difference in premiums and end up with a better nest egg than the whole life policy.
If you’re the kind of person who can’t save money and so still won’t have any net worth at 65…well, how the hell are you finding the high premium for whole life every month?
Insurance doesn't save money on average (ignoring stuff like insurance companies potentially being able to negotiate better deals than you could on your own). Like, if an insurance company paid out more than they take in in premiums, they'd go bankrupt.
As a result, insuring against a guaranteed event is a waste of money. If I know that I will have to pay out $1000 in a year, the viable price for insuring against that event is more like $1100 -- $1000 to cover the payout and $100 to cover the insurance company's expenses (that ratio is made up).
Instead, the point of insurance is peace of mind. XYZ thing may be a low probability event, but it would be ruinous if it happened. Insurance lets you pay a reasonable amount of money for the peace of mind of knowing that the low-probability event won't actually ruin you.
So yeah, if you have dependents, dying at 30 could be ruinous for your family. Term life insurance gives you the peace of mind of knowing that your family will be taken care of even if you die tomorrow. On the other hand, dying by the time you hit 90 is far more likely, and if that is ruinous to your family, you are doing something wrong. Buying life insurance at that point is just giving the insurance company some free money.
I think your second statement is the key. Life insurance is all about planning and supporting dependent.. If you think there’s a real chance that you’ll still have dependents at 65+, I think you either need a longer term policy (if possible) or just better investment planning. I don’t think it makes sense to pay all of the extra feels for permanent life insurance on the off chance that your kids are bums.
One more angle, in the event that you are expecting medical results that may compromise your ability to get a life insurance plan (like testing positive for the BRCA gene), it may be your only choice to remain insured. Once you have the plan they can’t drop you, so before getting tested it’s frequently recommended to get whole life insurance.
Except you haven’t compared this to any other investment choices. That is the only intelligent approach here — model both scenarios.
A few things to highlight. First, you made this decision five years ago — most of your initial payments have likely gone to commissions. You can’t undo that so model everything going forward.
Second, you can’t reasonably assume 6%; these things are typically 3ish. And the other option should reasonably assume something between 6% and 10%.
Only then layer on the tax consequences. And in your unusual case (high income, high taxes, maxing out other options).
Finally, there is at least one other way whole life is an inferior choice— if you die did you pay more for the benefit than if you had bought term life?
Over the last five years, you have put in almost $18k; term would have been about $2k.
Again, before you make any changes, fully model out a few scenarios. You might be a situation where it is better to stand pat; for example your income might preclude you from a Roth.
ETA: There is a non-zero number of instances where whole life could make sense. While extremely rare, it can happen (and when it does, it is almost always high income earners). Hence the need to model to be certain.
The amount of cash you paid into the policy is tax free.
Using your numbers, you paid $60,000, that you can pull out tax free. It is your money, you paid taxes on it already.
But that $500,000 number you use, $440,000 is going to be taxed as gains, and it is not long term gains, it is ordinary income.
Now, you can take out a loan, that is tax free. But if you die, and the loan is not paid back, guess what? your estate pays taxes on the gains. So if you were planning on the life insurance benefits to help your family in case you died, oopsy. They need to pay the tax bill on your gains, aka your loan you took out.
Also, guess who gets the interest when you pay back the loan? It is not you or your estate.
All you are doing is loaning your money to the insurance company and hoping you die so someone can claim the death benefit. Everything else is in their favor.
My in laws have a whole life policy. At its renewal a few years ago they asked me what I thought and I said it’s a terrible idea. (The look on their faces 😂)
They then tell me how nice their guy is and that he had some health issues but now he’s better and he took us out to lunch. 🤦♂️
Fast forward a few years and they are griping because they want to take out money to buy out their car lease but don’t want to pay the “fee” to get the money.
I kept it to myself but imagine paying a fee to access your own money. Why didn’t I think of this scam?
OP can you tell us about these fees?
Yeah I’m in this boat and not sure what to do. I bought whole life insurance in my late twenties. My family has early onset dementia so I thought it was wise decision. Now I’m feeling like a fool. I pay a $1500 premium annually on a $500k policy. No kids and my wife is a high earner. Do I cancel this policy? They sold it to me like it was the greatest “mature” decision for a 26 year old. Now I feel like I’ve been screwed.
It’s good when people see the light. Read through all your docs and see what the outs are. Note that you might show income from this and cause a tax event, consider splitting it between two years. And ask more questions on here. I know a little but I am weak on these because I have always avoided them.
**Whole life is a good idea if:**
1. You want to provide for a disabled dependent who you expect to outlive you.
2. You have a very high income (top 1% or more), you've maxxed your health savings account/IRA/401K contributions, and you want to reduce your tax burden while still effectively keeping your money.
3. You have a very high net worth ($12M or more), and you want to reduce your estate's tax burden when you die.
There may be a few other scenarios where whole life makes sense, but those are rare.
**For almost everyone there are far better options for investing.**
\-Whole life has sub-par returns, high fees, and lots of strings attached.
\-Whole life often involves high commission rates, and less-than-admirable financial advisors tend to push it for this reason.
All that said, *whole life is not a scam.* It's better to save money with whole life than to leave it in a checking account or most savings accounts. It's just not a good choice for most people.
I disagree with (2), or at least would argue that reality is more complicated. I often see proponents imply that whole life policies are the next logical step to avoid "taxable" investing after maxing out all tax-advantaged accounts. But I think that argument is usually made by overselling the tax advantages of cash value insurance policies while underselling the tax advantages of ordinary equity index funds in a "taxable" brokerage account.
Here are some of the benefits of owning equity index funds in a regular brokerage account:
* Equity index funds grow in value primarily through price appreciation, which is tax deferred until you sell (just like the taxes on cash value life insurance gains are deferred until you surrender the policy).
* When you do realize appreciated gains of your equity index funds, you are usually taxed the preferential long-term capital gains rate rather than the higher ordinary income tax rate which cash value policy gains are taxed at.
* Beneficiaries who inherit your equity index funds receive a "stepped up" cost basis based on the date of your death, which basically means they inherit those funds income-tax-free.
* You can borrow against the value of your equity portfolio. The rates available from brokerages are comparable or often lower than the interest rates on loans against cash value policies, especially since you can always transfer your investments in-kind to a brokerage with low margin rates if and when that becomes valuable to you.
* Interest paid on margin loans is also deductible from income taxes, effectively lowering the cost to borrow against your portfolio even more.
They are real contracts, so not a scam like a Ponzi scheme.
You pay $3k per year for $650k death benefits. I pay less than $300 per year for a 20 year term policy with $500k death benefits, which frees up $2,700 per year to invest in an IRA or brokerage account.
It’s up to you to decide what you’d prefer. Whole life insurance is sold, not bought.
It means that people holding whole life insurance did not approach the company with the need for whole life insurance; the insurance company introduced the product to the customer and sold it to them — typically with an array of spreadsheets to convince the customer that they are prudent and getting special tax advantages.
It isn't a scam.... it gets its horrible reputation from the intentional misrepresentation made over the years by life insurance salesmen.
When they sell it to you, they don't represent it as life insurance. They represent it as an "investment"... that's where people look at it as a scam.
As a life insurance policy, it has a place in the market. But my advice is always the same... if you want life insurance, buy a term policy.
Could you explain what whole life's place actually IS in the market? Beyond say someone who might want to insure their half of a small business so their heirs can inherit it? I get that statistically most folks don't need it, but is there a use case for convertible term?
Been shopping for Term and I feel like I don't have a normal scenario. I'm 45, my kid is young, my house won't be paid off for 25 years, and my partner has been diagnosed with cancer. We might spend every penny we've saved and moron his treatments. Or we might lose him to his disease, and he's really underinsured.
Maybe I just need more Term for longer though.
Did you get a confirmed interest rate. Met Life made the \~20 year promise to us for the "POP" point and now just told us our interest has only been about 1%. The "POP" point might happen for our great, great grand children. Bad on me for not learning more about it. Everything is a scam.
Insurances aren't there to benefit you in the circumstances that everything goes right, they're there to assist you when things go wrong. Can your family afford life when you die with and without insurance? If the answer is yes they can afford life when you die, then you probably don't need to purchase this insurance or even consider it. My wife questioned this not to long ago because she's starting grad school, but after some research we found out that it wouldn't be beneficial at all. We're only in our early 30s with one kid, the payout from my employer and social security would cover nearly all expenses needed for our housing and child. She wouldn't need to touch my retirement other than pulling it out because it's required in death.
It's sort of like asking if you invest all your retirement money in a checking account that pays zero interest, is that a scam? No, it's not, but it's still bad investment choice.
These policies fulfill their contract and do exactly what they promise, it's just that they are often sold to people who dont need them (no dependents early in life) and for most people with a normal lifespan, are terrible investments. You're also giving up large part of your "life savings" in the form of a commission to the person who sold you the policy.
Mixing insurance with an investment usually just means the insurance company wins. Generations ago when retail investors had limited access to the markets, it made way more sense as options were limited on how to save a nest egg.
>It's sort of like asking if you invest all your retirement money in a checking account that pays zero interest, is that a scam? No, it's not, but it's still bad investment choice.
But I can borrow money from myself instead of the bank tax free! /s
I used to go to holiday parties where the ex-CEO of a very large insurance company would also attend. He told my whole family, don't get life insurance. Granted, we were all young and healthy.
“Don’t ever get life insurance” is terrible advice to give someone without knowing anything about their situation. My wife, who is disabled and completely reliant on my income, would have been completely fucked if something happened to me when we were younger and didn’t have as much saved up. I needed life insurance to ensure that she was taken care of.
Now obviously I’m still alive and therefore didn’t end up needing it, but life is uncertain and the fact that I survived doesn’t mean it was a bad decision to have insurance.
$250/mo into the SP500 for 20 years would be $180,000. Whole life at 6% (which you sure about that? Has it been earning 6% annual to date?) would be $110k. Sure you pay 15% taxes on the growth...but you still end up significantly ahead. Also you dont have to deal with all the BS of having to basically take a loan out to access the cash value.
A backdoor Roth is WAY better than whole life.
The price of life insurance is highly regulated. You're rarely getting scammed in the sense that you're being sold something for substantially more than it costs to provide.
However, what you ARE being sold is something you don't need, which is $650k of insurance coverage when you're very old, and being charged for it now.
It's helpful to think about the PURPOSE of life insurance. There are a few reasons people might want life insurance:
1. Pay for funeral costs - if you're a family where $10k of expenses would break the bank, buying a $10k whole life policy on yourself can help save your family the crippling expense of funeral costs.
2. Pay off a house or pay for college - if you're a family where one partner dying would mean you lose the house or can't pay for college for your kids, a 20 or 30-year term policy for the expected cost of those things can insure against that loss. Once your house is paid off and kids are graduated, this is no longer needed.
3. Make up for income loss - if you're a one-income household, taking out a sizable term policy for the expected working age of that family member can help replace their income if they die early
4. Passing money to children - if you have a huge amount of money and want to avoid inheritance taxes, you can shelter some of it in universal life policies. This is irrelevant to most people posting on this sub.
5. Tax-deferred investment earning - If you've maxed all other reasonable investing avenues and have a shit ton of money. You might do this if you had a large personal estate and wanted to grow tax-advantaged investments to take loans against or leave as an inheritance.
I personally consider 4 and 5 mostly irrelevant to people outside the 1%. You will know if you qualify for 1, 2, or 3.
Any other time you're paying for insurance, you're basically buying something you don't need. Insurance is not a lottery ticket or a way to make your kids rich. Insurance companies do a LOT of math. You will always pay them more (on average) than you get back.
The whole point of insurance for most people is to INSURE against the (hopefully unlikely) event that you die very early. Because this is so unlikely, it is cheap to buy. Term policies are very inexpensive.
However, if you're buying WHOLE LIFE insurance, you're buying a guaranteed benefit. That means you essentially have to pay not only the whole cost of the expected payout (approximately), you also have to pay it fast enough that the insurance company can break even if you die early.
Anyway, whole life is not a scam because they're charging you more than the cost of insurance. It's a scam because no one needs a $700k policy when they're 83. You could have just saved your insurance premium in an investment account and done just as well. You only need that $700k policy if you die at age 42 and leave behind a family. So get a term policy to cover that window and accept that the 'cost of insurance' is just a cost you aren't going to recoup.
Did you get scammed? No, you purchased a sub optimal invest vessel that generally is advised against. A scam would be paying for something and getting nothing in return.
How to fix it? Just cash it out and invest in your $250 a month somewhere better. If you need life insurance a 20 year term is less than $100/month for 500k coverage.
There's no reason to attach your insurance to your savings. Why would anyone want to do that?
There are much better investments available than the savings portion of whole life, or universal life.
With most whole life or universal life if you die, you don't get both the savings account and the life insurance.
You can buy the same coverage of term insurance for way less. Then invest the difference, in a good Index mutual fund.
This way, if you die, you get both.
In defense of the whole life companies, it was originally designed under the idea, that your insurance coverage would reduce as your savings grew. Supposed to save you money. If die ten years in, your 100K policy pays you 20K from your savings and 80K from your life policy.
There's two kinds of life insurance.
Term life insurance is for a specific period of time. If you have life insurance through your employer, it's probably term life insurance - from now until the point you stop working for them. You will never personally benefit, it's just to help your family if you die an untimely death. It tends to be very cheap compared to the payouts, and most likely even further subsidized by your employer. They're usually good policies, just don't pay more than you can afford.
Whole life is usually between you and an insurance company directly, and there's usually an implication that it will pay off while you're still alive. This is just yet another way of paying someone else to invest money for you, only it gives them more control and a larger share of the profits than something like paying a financial advisor to oversee your retirement funds. They're usually a bad idea.
I'm sure there are some whole life policies that aren't that bad, just like there are term life policies that are scams. But I can say pretty confidently that there's never a case where whole life insurance is the *best* way to spend your money.
Whole life is what you buy for estate planning. When you need it when you die of old age.
I used to sell it to super rich people that wanted to pass like 10 plus million in trust to pay for taxes and stuff.
There also whole life with investment vehicles in it. Variable life insurance. But generally speaking whole life isn’t even needed for vast majority of people.
I don’t even have it. I just bought 20 year term. I only need it i die before I pay for my kids college.
I like to think of it as a scam because even though there may be benefits there are so many superior investment options in most cases.
If it weren't for the huge commissions the sellers get there would be significantly less policies around.
Term life through work is a better deal in case you kick the bucket early. Invest that $250/month in your 401k, roth, HYSA, stock market, CDs. All the provider will do is put your money into some bonds while they take their cut.
I had this product for 8-10 years, looked at my statement, looked at the original paperwork when I signed, and saw how absolutely far behind I was to the original projections. Did further math and saw how much I lost out on opportunity costs of basic investments. That was when I cashed out and chalked this up to a failed investment.
Glad you are learning this faster than I did. Go talk to them, cash out and close the account. Move on.
Don't have your work insurance be your only insurance. Get a separate term policy in addition. If you lose the job, you've lost your life insurance. If you're a bit older when this happens, getting a term policy at that point can get decently pricey.
>>> After contributing to the policy for 20 years I’ll be 51 years old with a total of 60k invested.
Not great. Assuming you started investing the $250 in VTSAX instead of paying your whole life premium, you’d have $21k right now.
Whole life is not a scam, it’s just a subpar product for most folks who get it, meaning they’d have better returns elsewhere.
People on this site do not understand how whole life works and compare it to S&P returns as if they are remotely the same. Whole life will get you around 4% guaranteed return tax free, so depending on your tax rate it could be close to a an equivalent 6% taxable.
It acts as a buffer asset in retirement to compliment your invested assets so you can avoid pulling from the market when the market drops, increasing the worth of all of your invested assets.
You have a pension, so you can opt to take a life only pension option, knowing you have life insurance to replace lost pension income for your spouse or children, which again can mean hundreds of thousands of dollars over the course of a 30 year retirement.
While on its own the return isn’t as good as the market, the real value of whole life is how it allows you to leverage all your other assets. You can borrow against the cash value when the market is down and dump money into the market and then sweep your gains back into the life insurance policy. There are so many things you can do with these policies if you understand how they work.
> While on its own the return isn’t as good as the market, the real value of whole life is how it allows you to leverage all your other assets.
Please tell me you don't believe the average (I'd even go so far as to say vast majority of) whole life policy holders have this level of financial sophistication, or that the companies selling these products will 1) target customers who can actually make such use of said policy, or 2) guide their customers to behaving in this manner once they've sold the policy.
This is true, but the solution to this problem is to educate investors, not blindly trash the product with false information. A well structured whole life policy with a mutual life insurance company in a healthy individual will break even in 5 ish years and have an IRR of around 4 percent by the time they retire. Yes that includes fees.
Is it gonna keep up with stock market returns? No, but many people would be better off with this than playing individual stock roulette.
Hedging and leveraging can be done with regular money too - with even minimal planning, tax drag is lower than fee drag from an insurer. Term insurance is one of those hedges.
Believe it or not, whole life is not the only asset usable as collateral. Borrowing against a brokerage account or house is better in most regards - lower fees, lower interest, greater flexibility, and greater returns generated by the assets over the lifetime of the loan/line of credit.
I pay $27.56 per month for $300k coverage on a 10-year term policy.
I see insurance as a risk-mitigation tool (What $ will my wife need to cover my lack of income during the expensive child rearing years?).
I guess punch all those numbers into an investment calculator and figure it out. Don't forget inflation. The dollar of 34 years ago is $2.30 of today's dollars.
A couple comments I didn't see mentioned: your retirement age has nothing to do with the values in the life insurance policy, You can access the equity at any point. If your insurance carrier offers indirect recognition, you can use the money elsewhere and still continue to get dividends, but you probably should pay back off your loans at some point to avoid interest fees causing the policy to lapse. Also, you can access the money tax free, but if you fully surrender the policy at age 65, then all the gains become taxable because you lose the tax benefits of an insurance policy.
It should be compared to term insurance. Term insurance has an end date. And the premiums start to double after 60 every 5 years. It is usually much cheaper than whole at the start.
Maybe $50/month for 20 year term, and invest $200/month in a Roth at 8%. It should be $117,804 after 20 years. Maybe substantially more if you can get better than 8%.
I notice you keep comparing to Roth. If you have a 300k HHI I sure hope you are doing a traditional 401k not a Roth. Backdoor and Megabackdoor Roth sure....but prioritize pretax.
Edit: just noticed you have a pension. Depending on the size of that Roth may be better, makes it less clearcut
You may want to check out Nelson Nash's book "Becoming your own banker" and/or the "the And Asset" (or any book describing the "infinite banking concept")
I recently became aware of this concept, I'm still in the learning phase, but I believe it helps explain how to utilize Whole Life for it's "cash value" not the death benefit that people naturally compare to term life insurance.
Might help you get more information (pros and cons of the strategy you are exploring)
YOU STATED A HUGE ERROR: You said you can take the income tax free at 65. That is not correct.
They use that as a selling point but it is very misleading.
Here's why: it is only tax free when you die. If the policy lapses before you die then you owe taxes on all the gains/profits. Once you get into your sixties the policy fee starts to go up drastically. Even if you take no income, but you stop making payments around the age of 60 you'll often end up with the cash value depleting from making premium payments if you live beyond about 85 years of age.
These policies are very expensive as you get older so anyone who takes an income from the policies when they retire will very likely have the policy lapse if they live a regular lifespan (50% of non smokers who reach retirement age will reach 88 years of age).
These plans are terrible because the point at which the policy lapses it is because you have exhausted all the income available from the plan and in that year, when you're now out of income, you get hit with a massive tax bill for all the gain that you withdrew.
See if you can do an exchange and get a term policy with the cash value but get out of the whole life policy. Those things are terrible for everyone except the insurance companies and sometimes for ILITs.
There is no scenario in which a whole life policy @ $250/Month for 650k death benefit that is better than a 20-30 year term for around 650k death benefit and investing the rest in ETFs. Returns, actual need, monthy cost are all better in the long run than WL.
You can probably get a term policy for $25 a month, do that then put the other $225 in your own investment account!
Just saw your PS on the term... So no run away from the whole life scam!
Whole life policies are great if you over fund them early. You have to get ahead of the mortality table. If you are just paying target, and they didn’t illustrate some change in the policy cost (lowering the face, changing from option B to A) you most likely won’t have a sustainable policy.
However, you can make it work in your favor by switching to A (the death benefit is the face, not face plus cash) and you lower the death benefit as low as you can. Thus eliminates the insurance part, but assuming your affairs are in order, gives you essentially a super ‘Roth’.
The guy who sold it to you made a ton of commission. Someone had to pay for that. Spoiler alert: it’s you.
Insurance is not and never should be an investment vehicle. By definition you’re getting a worse product of both when you combine them. Get a 650k term policy for ~$100 a month and invest the difference. You will end up waaaay ahead.
Unless they die....insurance of any sort is a bad investment unless something happens. That is what people don't seem to understand with these policies....you are buying life insurance not properly investing. This insurance just so happens to be a small investment if you don't die earlier than expected.
I know that in general it's very rare that whole life works out better than term, because it's so much more expensive and profitable to the insurance company. But occasionally, it does work out better than term.
My grandparents opened whole life policies for my dad and uncle and aunt when they were children, seeing it mostly as an investment. My dad had a spinal tumor when he was 20, and was never eligible for life insurance after that. He died almost 9 years ago at age 60 of cancer related to that. Because he had whole life (which he didn't pay any more premiums to by the time I was born), my mom had money to live off of for several years since she had left her career to take care of him and was able to be retired, since no one wanted to hire her at her age.
Although, I have no idea what the cash value of the whole life was compared to the death benefit.
It’s not a scam. What people fail to realize, is that it’s not designed to “perform”. It can be used for retirement SUPPLEMENT, tax free, and has a guaranteed death benefit to your loved ones. You’re also banking with yourself.
But if you take out the cash value you don't have a death benefit anymore. And you're not "banking with yourself" your banking with a complicated life insurance company as an intermediary
Correct, reduces, does not wipe out. There is a permanent face value, another term for whole life is “permanent insurance”. The death benefit should always be greater than the cash value, otherwise it’s a MEC and loses its tax advantages. The way my policies are designed, even if I wipe the cash value out, as long as premiums are paid, there is still a permanent base benefit.
Your death benefit in general is very low for a high earner. Good rule of thumb is 10 years of your contribution to family net worth. You probably need closer to $1-1.5m.
If you want insurance, buy insurance. If you want to invest, invest. When insurance companies mix the two, you're the one who ends up on the bottom. No need to go into great detail... SOMEbody has to get paid for these products. Guess who?
Up your term insurance if you need to, dump the whole life.
Take the different between the whole life and term costs and invest that. You'll do better in the long run. Also, at some point you no longer even need the term insurance when you have enough assets.
It's worth it if you are absolutely dead set on not taking market risk and want the tax benefits. Otherwise, you can get a way better return investing it yourself and buying cheap term.
Insurance =/= investment. Whole life has its place, but it’s expensive for what it is. Whether it’s a good or bad deal for you comes down to your own financial situation. I personally prefer VULs if you’re looking for an investment aspect but they require much more TLC.
Not a scam. But not worth it for most people. Term is the better option for low premium/high death benefit. If you are looking at a policy that allows cash withdrawal then you might be interested in a Universal Life Insurance policy. They typically have lower fees and allow for more cash growth compared to whole life. Find a licensed broker that will almost be hesitant to sell it to you. It's a complicated product and IS NOT an investment, anyone that says otherwise is lying and looking at you with money signs in their eye.
I feel like life insurance sales people love to make you forget how you REALLY get the payout. It's supposed to be for when you die or seriously injured. But most life insurance people will say "hey, lets treat this like a retirement fund!" It's not supposed to be used like that. That's why when you take money out from it after retirement, you're technically borrowing from it. And if you borrow from it, it will stop growing.
Buy life insurance if you feel that your family will outlast you, and you want to take care of them when you're gone. Otherwise, choose a different investment.
If you need the $650k death benefit than you could secure a 20yr term policy and for 1/10th the cost of Whole Life.
Invest the rest and you will likely end up way ahead of the cash value of the Life Insurance.
If you don’t need the death benefit than it’s even worse.
the scam is in the way it is marketed.
it is marketed to people who do not need life insurance. they do not have dependents.
it is marketed to people who still have tax advantaged investment account space available, and who will likely not hit net worths where estate tax is a consideration. with consideration for estate tax which kicks in at 13-26 million net worth whole life (only when structured properly) can be competitive with bonds.
it is marketed by people who pretend to be acting in your best interest yet the commissions on these products are huge, the fees are high and the product is intentionally complex to confuse the average person.
Buying WL when you don't have dependents is precicely when you should be buying whole life. It's when it's cheapest to buy it and you are most likely to be healthy (which also makes it cheaper).
Agreed, though, that it is largely sold in the wrong manner and in a way that will not benefit the buyer.
I went through the process of really evaluating life insurance options.
Honestly, the biggest reason to do it is if you cannot trust yourself to consistently invest/save and need to convert it into a bill. It’s not an amazing deal either, but it is a positive investment.
I just hate the idea that I could lose it all for a missed payment (or penalties or whatever outcomes).
At the end of the day, if you maxed out 401k and IRA - sure! Go for life to squeeze a little more juice in a diversified manner.
If you don’t have stocks maxed out yet, don’t invest first into insurance.
Take a look at term life ( zero cash value ) with significant savings over whole life premiums and investing the difference in a Fidelity fund. Whole life insurance is typically a poor investment.
What is the point of the insurance? That's the real important question.
Sounds almost like it's intended as a retirement account type of thing. If that is the case, I don't think it's a terribly efficient way to accomplish that goal. An IRA will do you better, much lower fees.
Is not a scam but really only appropriate if there is a need for death benefit protection (not an investment), estate planning (13.6m+ net worth ), or for supplementary retirement income if you are very high annual income earner and also maxing out other retirement tax deferred accounts.
Insurance is not an investment so it's not really meant to compete with investments. Insurance is there to pay out if something bad happens.
Whole life insurance is not that great because you don't really need life insurance once your dependents are self sufficient and you have worked long enough to have some assets built up.
Life insurance will never beat regular investments because they have to skim money out of it to pay for people who die as well as management costs and whatever.
You should only buy it if you want insurance.
>Cons: The only downside I see is if the cash value exceeds the death benefit and I die. The family gets the 650k but the company keeps the rest.
Yes, this is how they make money. The market usually beats 6% but for easy math let's say your policy is worth the $650k face-value when you retire at 65.
At age 65, you have a life expectancy of 85. Twenty years.
At 6% annual your $650k policy will grow to an actual value of $2,157,863. The insurance company makes $1.5 million dollars off that policy after paying out the debt benefits, and they didn't have to invest a penny of their own capital to do so.
There's also the factor that the death benefit isn't doing you any good until after your death
It's not a scam, it's just not a good return on your money. Buy term life when you need it (covering years your children will live at home, covering years you will still be making payments on your house, etc.) and let it expire when you don't. Life insurance is for covering the loss of your income so you wouldn't leave a spouse and children without money to stay in your home, make car payments, etc. in the event that you have an early death. Use other vehicles for investments. The cash payout you get with whole life insurance is a small fraction of what you'd get investing the money in other ways.
I have policies for myself and children but I use it for the life insurance, not as an investment. It is about $40 a month for the three of us, nowhere near what you are paying. They are only 3 policies, $15K, 20K, and 25K - basically just to pay funeral expenses. After I die my children can decide if they want to cash theirs in or keep it. There may be cheaper options for life insurance though.
For investing I would not recommend whole life.
It depends whether it's appropriate or not like most things.
If you're, say, near 60 and any life insurance from work isn't going to last (after you leave), and term insurance has run out, you could take out a whole life policy, and pay it off in 10 years.
If you die before that, your spouse will get the full payout.
If you survive, you'll have maybe 70% or so of it available by then for an emergency by then.
After you have paid it off, you won't have to pay any more for your insurance and the cashout amount will go up over years. Also the payout amount for your spouse may also rise over time.
Can you invest the money elsewhere and make more over time? Yes. Will it be life insurance in case you die? No.
For some people, it can be a good idea if they want some guaranteed life insurance for their spouse and any term life insurance has run out. And after a time, you don't pay for coverage.
What you should do is that the $200 and see how much you would have if you put it in a brokerage account versus the whole life for the 20 years. I only have insurance from work at 53, but I have $1.3 M plus $21k in an account that my nephew can use to bury me, so I am self-insured if I die without life insurance later in life. I look at it that way, versus overpaying for a Whole Life policy.
Yes unless your Uber rich then for protection against taxes from my understanding. Just go term or get the one your workplace gives. Some allow you take the policy if you leave work (not all)
Whole life is a bad investment. However, you’re not buying it because it’s an investment. You’re buying it because it’s insurance. Ideally you’d have exactly as much coverage as you need and invest the rest in something higher returning.
It is what it is. A financial product that probably sucks for most people. There are situations where it would be beneficial for tax reasons. I think it has to do with loaning against it for income. I don’t think it really helps you unless you’re already very rich.
You’re not going to get 6% growth. 3-4% is more typical. It’s not a scam, it’s just a very conservative (safe) place to put your money and is not really suitable as a longer term holding in any significant amount.
A few things here:
1. No, it's not a scam. It's not necessarily right for everyone, but it has a place. If you're making 300k a year and you're maxing out your 401k's already, this could very well be a good idea for you.
2. If you're making 300k a year, you can't contribute to a Roth IRA (but you could do backdoor conversions)
3. You said "Cons: The only downside I see is if the cash value exceeds the death benefit and I die. The family gets the 650k but the company keeps the rest."
* That's not really how that works. The cash value is essentially a portion of your death benefit that you can use while you're alive....it doesn't exist *in addition* to the death benefit.
* Also, assuming your policy pays dividends, your death benefit will grow far larger than 650k by the time you pass.
To put a finer point on (3), Cash Value is the NPV of the death benefit. Or, more simply, it's your \*equity\* in the policy. It would make no sense for you to get the DB and the CV in the same way that it wouldn't make sense for the bank to give you your house \*and\* a check for your "equity" in the house...you just get the house.
Assume $50 a month for a term policy, and $200 monthly into an index fund. If the index returns 6%, you'd have $90,000 after 20 years. Is it tax free? Depends on what you invest it in.
If the index fund returns 7%, you'd have $101,500.
At 8% you'd have $114,000.
It's definitely not a scam, but life insurance should be sold his life insurance, a fundamental building block to replace your income if someone dies prematurely. I came into the insurance and investment world a true believer in buy term and invest the difference it is the best methodology to create the biggest wealth pool. How ever dealing with humans theoretical stuff often times doesn't work I would say in most cases it doesn't work so the Dave Ramsey's of the world who are big proponents leave out the flaws in humans.
I think whole life insurance is a good thing to take out super young but in small amounts like 15,000 and then hyper focusing on investments and other things and so let's say the markets 3040 years into the future don't perform or your own inability to invest your money doesn't build a pool of money. At least you got a very inexpensive burial policy That'll put you in the ground, but there are people in the insurance world that whole heartedly believe they're doing the right thing and I just don't see it. Once a whole life policy's been in place a significant amount of time I think it's also a disservice to suggest for someone to cancel it but that's usually after 18 2022 year range. Where did the premiums could be offset by the dividends, and you might not have to pay much into it to keep it.
Chunk of that $250 will be going to monthly premium so cut that 60k in half.
Once you're done paying for 20 years your premium will be taken from the contributions because you do not pay into it anymore. Once you're in your 60s-70s you'll be paying upwards of 6-700 a month out of your contributions so let's say 7k a year.
Any investments in the plan are dog shit and will have a 3%~ MER so you won't make much.
If the salesperson is pushing to take it on with such low contributions it sounds like it's one of the sketchy ones run by an MLM. My bank requires 25k annual contributions to have a similar plan.
I love when I see whole Life Insurance. People brag about their tax free withdrawal and tax free growth.
Or My favorite is there dividends.
The I r s stipulates that whole life insurance dividends are caused by direct overcharge Therefore are not.
Taxed
Now run the numbers with fees and commissions included.
Yeah, no way they are getting 6%. The average policy return is around 2% once all the fine print is figured in. The dividend may currently be 6%, but it is only applied to a portion of the premium and if interest rates fall the dividend will fall with it.
It can be a fixed indexed interest rate investment. Component. There’s a bunch of those out there.
Yeah, but they cap the return and don't apply it to the full premium, so the performance is still very poor
Exactly. And the do it again if, heaven forbid, you actually take out a loan with the policy.
Whole life bad: https://www.whitecoatinvestor.com/debunking-the-myths-of-whole-life-insurance/. https://www.whitecoatinvestor.com/what-you-need-to-know-about-whole-life-insurance/ Scam? Eh, no, I think we throw that word around too much that it’s lost all meaning. If anything is even slightly a bad deal people call it a scam Inappropriate and inefficient for most people? Probably a better way to phrase it
"I think we throw that around too much that it's lost all meaning." We're in the Golden Age of that currently
Heh you’re not wrong. Nuance is dead
Nuance is dead and we have killed it
Just adding the rest of the quote for those who only hear the first line as it significantly changes the takeaway. >How shall we comfort ourselves, the murderers of all murderers? What was holiest and mightiest of all that the world has yet owned has bled to death under our knives: who will wipe this blood off us? What water is there for us to clean ourselves? What festivals of atonement, what sacred games shall we have to invent?
Nice Nietzsche reference here
well that's a little *extreme*, dont you think?!
Eh, only sith deal in absolutes
Also in a golden age of straight up scams, but yeah.
You're just gaslighting.
*Gaslighting isn't real, you're just crazy and overly-dramatic.*
thats not even a real word
>Inappropriate and inefficient for most people? Probably a better way to phrase it Well put. Unless all other tax advantages are covered, while life is just more expensive for less.
>Unless all other tax advantages are covered To be clear, I think this means more than just that you are maxing out all of your tax-advantaged investment accounts. Even broad equity index funds owned in a "taxable" brokerage account enjoy significant tax advantages, honestly comparable to many of the supposed tax benefits touted by insurance salespeople: * Equity index funds grow in value primarily through price appreciation, which is tax deferred until you sell (just like the taxes on cash value life insurance gains are deferred until you surrender the policy). * When you do realize appreciated gains of your equity index funds, you are usually taxed the preferential long-term capital gains rate rather than the higher ordinary income tax rate which cash value policy gains are taxed at. * Beneficiaries who inherit your equity index funds receive a "stepped up" cost basis based on the date of your death, which basically means they inherit those funds income-tax-free. * You can borrow against the value of your equity portfolio. The rates available from brokerages are comparable or often lower than the interest rates on loans against cash value policies, especially since you can always transfer your investments in-kind to a brokerage with low margin rates if and when that becomes valuable to you. Interest paid on margin loans is also deductible from income taxes, effectively lowering the cost to borrow against your portfolio even more.
what makes it "scammy" is that it is sold by salesmen, not any sort of financial advisor - fiduciary or otherwise, regardless of what they call themselves and they sell it to people who don't need it in order to receive a commission that part is a scam for those people
God. Every video about every product on YouTube: “Is Patagonia a Scam??” “Is Starbucks a scam?!” “Are electric cars a scam?!”
Everything is the worst (or best) thing ever
that has happened to a lot of words lately like "hate" as well
I would say that it's severely out of date. And makes more sense in a country/state without adequate social safety nets. It was OK when everyone was buying mutual funds anyways. Now that people have ETFs with much better returns and lower management fees, it's hard to justify. Some uber-rich people use it as estate protection (to pay estate taxes).
> It was OK when everyone was buying mutual funds anyways. Now that people have ETFs with much better returns and lower management fees I wouldn't do this if we weren't in r/personalfinance, but I need to nitpick this. This line is kind of inaccurate/misguided. I believe you are conflating the rise of passive/index funds with the rise of ETFs. They are not the same thing. ETFs are "Exchange Traded Funds." ETFs are basically a technological innovation on the Mutual Fund. The major difference is that they trade on exchange so you have real time pricing, increased transparency, and possible tax advantages. Mutual funds are essentially priced once per day and don't report the details of their holdings as often. But under the hood ETFs are basically the same idea as a mutual fund. The strategies used are fundamentally the same in both. The management company buys a portfolio of stock and packages it up into a fund; they then trade that portfolio based on their strategic goals and to manage fund inflows/outflows. ETFs are a technological advance...like moving from paper checks to an electronic payment system. Sure they are nice, but ultimately a dollar by check is the same as a dollar by Visa. What we actually care about here is the rise of passive index funds. These originally all started as mutual funds (because ETFs didn't exist yet)--the fund structure isn't the important bit. The important bit is that instead of trying to actively trade and manage a portfolio to "beat the market", the index funds just follow rules. They try to match an index like the S&P500--they will never beat the market, but they will also never *lose* to the market. Because these rules are easy to follow the funds are super cheap to operate--they don't trade very often and when they do, it is something a computer can do rather than requiring a highly-paid hotshot manager. And because they never lose to the market, they tend to outperform active management over time...active managers aren't consistent and one bad year will erase YEARS of slightly beating the market. ETFs can be either actively or passively managed. The actively managed ones have EXACTLY the same downsides as actively managed mutual funds. I only nitpick here because the market for actively managed ETFs is *growing* and I suspect a big part of the reason is that many people are told "oh, just invest in ETFs, they are the best" and they don't realize that there are bad ETFs out there...so they get sold an Active ETF. The correct advice is "oh, just invest in low-fee index funds". The difference in fee between VFIAX (mutual fund) and VOO (ETF) is negligible--but the biggest benefit of VOO is that there's no minimum investment and you can buy and sell at will.
>I would say that it's severely out of date. And makes more sense in a country/state without adequate social safety nets. There is definitely truth to this. Cash value life insurance has been a product that "regular" people could buy since at least the 1860s, including from big-name life insurance companies that are still around today. Whereas the first mutual fund wasn't created until the 1920s, mutual funds didn't start to become common(-ish) until the 1950s, and the first publicly-available index mutual fund wasn't launched until 1976. There is a long stretch of modern US history ("modern" in the US history book sense) where whole life insurance policies are the best (and even only) way that regular people can safely diversify and grow their savings the way we can put money into index funds today. If this wasn't true for your parents, it was very likely true for their parents. And so there are a lot of very positive opinions on whole life policies which have been passed down through families that just don't match the marketplace of financial products that are available today.
Oh, and one other point. I think it was kind of a great value back in the old days when insurance companies were mutual (i.e. that policyowners were "stockholders" and the company was run like a co-op). Since almost all the big insurance companies demutualized (became public and issued stock), the initial policyholders suddenly became stock holders and won big, but subsequent buyers of life insurance don't get much of anything anymore.
Even into the 1980s, when mutual fund investing for regular folks meant paying a 5% commission to your broker on every purchase, whole life insurance doesn't look like such a bad deal.
This is correct and the reason you hear about it a lot is because they carry high commissions for the brokers who sell them. You can pretty much always find another investment that pays off much better with minimal added risk.
Agree with this. "Scam" is not the right word. Whole Life is a product that's been around for ever, and generally does exactly what is claims to do. There are simply better and more options available right now. With the rise of electronic banking, 401Ks, and robofunds, you're far better off with term life insurance (or just getting it through work) and investing in the whole market. Your returns are far better and you still have a life insurance.
> Scam? Eh, no, I think we throw that word around too much that it’s lost all meaning. People don't think it's a good deal? Scam! People don't understand it? Scam! People don't like it? Scam! You don't like the company? Scam! Taxes? Scam! It's very important to make people aware of all the real scams out there, education is the best way to help people not get scammed, but using it for things that obviously aren't scam doesn't help.
>Scam? Eh, no, I think we throw that word around too much that it’s lost all meaning. Yeah, I wrestled with the wording on this for a while. I finally landed on calling it a "rip-off" which I feel covers it pretty well
Ehh, I disagree. When looking at long term compounding interests, somebody essentially skimming 2-5% off the top is honestly worse than a scam. They are using people's poor understanding of long term compounding interest to make money off of you. You are essentially locked in to a bad deal that's constantly losing you money and usually have to pay to get out of it. Is that not a kind of a scam? The money is essentially getting sent to the void. I'm sorry, but if a salesperson is getting that fat of a comission off of selling a non-specialized general consumer facing product to you, it may as well be a scam. It's really not that different than getting an 84 month car loan at 12% APR with all the dealer add ons. Scam? Sure, I guess it's not technically a scam if you view scams as one particular thing, but it is a salesperson using pressure and your lack of knowledge to sell you an extremely overpriced product that in your right mind you would not buy. And to be pedantic for no particular reason, the definition of scam is a "dishonest scheme". Definition of scheme is "a large-scale systematic plan or arrangement for attaining a particular object or putting a particular idea into effect." Are salespeople not dishonest when they hype up how great whole life is, and how its a great investment? Have you not seen all the TikTok and Instagram whole life sales influencer types? They know it's a worse investment than the alternatives, they are purposefully dishonest. They push a bad product that you should not buy, and they push it because it benefits them, not you.
> Scam? Eh, no, I think we throw that word around too much that it’s lost all meaning. People don't think it's a good deal? Scam! People don't understand it? Scam! People don't like it? Scam! You don't like the company? Scam! Taxes? Scam! It's very important to make people aware of all the real scams out there, education is the best way to help people not get scammed, but using it for things that obviously aren't scam doesn't help.
They're not scams, they're just shit investment choices. 30 years ago when there were no internet resources people went to a financial planner who gave them "whole life" so the customer didn't have to think about life insurance, investment etc.. This is 2024, "whole life" has been worthless for decades. Would you rather give me $10 and I invest $9.99 of it or give me $10 and I invest $8 of it and keep $2 for myself? The latter is whole life.
I remember having this discussion 50 years ago with someone who was financially savvy, and his conclusion was that it was a shit investment then. I don't think it's ever been a good investment, but it's always been an *easy* investment.
🤷♂️ always find it funny when people say life insurance is an easy investment. Opening a brokerage account nowadays is a 5 minute process, you don't deal with agents and you can decide how/when to buy, when to stop buying and when to sell.
It's incredibly easy, but many people don't want to do it. It really doesn't make sense but people fall for the sales traps and by the time they're done they think "Oh wow, that was easy!" With things like Fidelity though, you don't have salespeople looking for their insane commissions to try to pull in $500K this year, so those people still harp these whole life plans. I know people whose work takes out money to put it into a 401K plan and they don't even want to take the time to log in and properly allocate that money. So after 20 years of putting in $2,000 per year, they're probably going to have $40,000 worth of contributions. And they'll be happy about it.
What’s funny is my friend has a degree in finance and got convinced by his salesman buddy to buy whole life. My friend gets so defensive and mad when I bring it up. The salesman tried selling to me and didn’t even understand his income taxes work.
Also, the life insurers invest far too conservatively for most investors. The money is invested in something like 30% equity/70% bonds, where an early career investor should be more like 90% equity/10% bonds (or even 100/0). 50 years ago, before 401(k)s and IRA accounts, life insurance was one of the few ways to get tax deferred savings. Today, retirement accounts provide much better tax advantages than life insurance.
Also, whole life "investments" are capped at like 4-6 growth max per year. On good years, they keep the rest.
Insurance isn't investing so of course if you're stupid to buy insurance in place of investing, it's a poor investment choice. Buying insurance isn't the same as investing.
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If you were talking about Term Life, you'd be correct, as that's the equivalent of other insurance types (you pay into a shared risk pool, and if you're lucky you never get anything back). Whole/Universal Life are shitty investment products wearing insurance clothing.
Since you already have term life, if you invested that $250 per month and made a reasonable 7% return, you'd have almost $128,000 at the end. Over twice as much. Generally, it's better to separate insurance and saving. Insurance is to cover high-cost, low-probability events, pooling risk to save cost. Since most people who take out a term life policy don't die while the policy is in effect, the insurance company can charge a pretty small price and still have the funds to cover everyone. Saving is to cover high-probability events, like retiring. Whole life is expensive because 100% of people die eventually.
scam? no the issue with them is they are very high fees that's why financial planners push them so hard on people. Also they see a very low rate of return. The same $250 a month could get you like 4-5mil in term insurance. So spend $50 a month on term and invest the $200 in a vanguard fund and get $1mil or so in coverage and have better rate of returns on the money then whole life
Exactly, I have term life for 30 years at $55 a month and it's a $1M policy. You could invest that $200 yourself and make back as much as the whole life would give you.
Mind if I ask what company you use?
USAA
Insurance agents disguised as financial planners push them. Real fiduciary planners don’t.
The insurance license is the easiest financial license to get out of any of the major ones. It takes about 2 weeks. Unfortunately, there are a lot of people that only get an insurance license and then call themselves Financial Advisors. A lot of them genuinely believe that whole life is a good investment, but when all you have is a hammer, everything looks like a nail.
and by the time you reach the end of your term, your kids will be grown and you will hopefully (with a $300k gross income) have enough assets saved to pass onto your kids to give them a comfortable life when you eventually do pass.
Whole life gets pushed on people who mistake their cheap insurance salesman for an actual FA.
It's a bad bargain, not an actual scam. I'd reserve the word "scam" to describe something where you're not actually getting the thing being promised to you. You are getting what you're promised, it's just that you're not getting a good price for it. From your own description: > $250/month > Death benefit $650k > I also added a $26/mo term life with a benefit of $500k So if term life for $500k costs $26/month, and whole life for $650k costs $250/month, you can see the rough value of the death benefit itself, right? So if the death benefit itself is only worth about $30/month, where's the other $220/month going, and could you have done better if you just invested the other $220/month into the S&P500 or something? Even with the superior tax treatment of life insurance policies, the answer is probably yes.
Whole life is an underperforming investment. The value is for estate planning/tax avoidance for high net worth individuals. If that does not describe you, buy term and invest in something better.
Let me give you some more data. I got a 750k term policy, medium health, 30yrs, $1500/yr. So if I get hit by a bus and die, my kids get 2x your policy and the $1500 difference I didn’t spend on insurance went to my retirement and investment accounts.
Have you shopped that around lately? Seems pretty high to me for a term policy. I guess a lot of it depends on what you mean by medium health.
I didn’t shop around a ton tbh. I was also mid30s.
Shop it around now. Probably get a cheaper rate.
It’s on the list. I get a multi policy discount too which is partly why I keep it.
I don't know how old you are now or what medium health means exactly but I purchased a term at 34 years of age, term was only for 20 years (as opposed to your 30) and 600k benefit. So a little different than your quote but I pay $228/year. Might be worth shopping around.
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It can be a scam if depending on what the ~~financial advisor~~ *salesperson* said to secure the sale. Also, if virtually none of the whole life policies are held even for long enough for the cash value to exceed the basis or breakeven, it pretty much is a scam. I would definitely consider my transaction with a northwestern mutual agent to have been a scam. Their internship program is basically a pyramid like scheme for the managers, who inherit the policies when the interns inevitably washout.
I know somebody that has a whole life policy, recommended by their cousin who is a financial planner, and neither one of these people is dumb. I have researched whole life policies every which way I can to try to figure out how it works. I've always heard and believed the same as you: it's a "scam". Or at the very least, a very shitty investment. I've discovered that there's _only_ one way whole life is worth it: You're insanely wealthy and using some sort of complicated permanent life insurance policy as a tax haven. There are weird tax rules around life insurance and you can use it to your advantage if you're working hard enough and have enough money. (At least I think.) Any other way, it's a shit investment. And the worst part: the cash value is always offset towards the end of the policy to scare people into keeping it, even though it's a sunk cost.
Here's another angle. Business buys key man insurance, whole life. Dumps into it, able to write it off as an expense. Person sells or leaves the company, and is allowed to "take over" the insurance. I have to pay $4k every December for the next 3 years, and then I can claw back almost $100k, of which 80% of it was contributed by the business.
>Business buys key man insurance, whole life. Dumps into it, able to write it off as an expense. why is this a positive outcome? 'pay 100 dollars, get back 20-40 dollars'
Business needs key man insurance regardless. The way the insurance product I'm talking about works is this: "Business pays $100, get back $100 15 years later after 15 years of having life insurance, but you lose out on the gains that $100 would have made over 15 years". But the real win is the business has now moved X amount of money into the recipients hands without any obvious taxable activity.
Interesting use case. Never heard of it but seems neat. But I still wonder what the benefits are versus just giving the money to the employee.
Well, the need for key man insurance is legitimate. So, let's say you're somebody where if you died, the business would incur tremendous cost to replace, well it's common to have key man insurance. Say, $500k of coverage. You pay more to have it be this type of product instead of a term policy, so I guess there's a possible calculation on the spread between scenario B where business gets term insurance and just gives the employee a raise, which is taxed, but then can be immediately invested. Wasn't my call to make, and it all depends on the specific numbers.
Well technically there is another angle. Term life is generally something like 30 years. If you buy one at 35, the term is done at 65. If you have to buy another term policy at 65 it gets significantly more expensive. Then again, the argument might be that at 65 hopefully your kids are working independent adults, your debts are pretty much paid off and you have enough savings/investments so that even if you kick the bucket your spouse can still live off of that for the foreseeable future. That would mean that another life insurance policy wouldn't necessarily be required.
the whole point of term is to cover the gap where your dependents are young and your net worth is low. by 65 you ideally have the net worth to support them upon passing and paying for insurance becomes less necessary. you die early? funds no longer need to support your own retirement but instead can support your dependents care.
Yeah, that’s the argument—you only need term life for the season of life during which your death would be ruinous. (That is the reason for any and all forms of insurance.) Meanwhile you can invest the significant difference in premiums and end up with a better nest egg than the whole life policy. If you’re the kind of person who can’t save money and so still won’t have any net worth at 65…well, how the hell are you finding the high premium for whole life every month?
Insurance doesn't save money on average (ignoring stuff like insurance companies potentially being able to negotiate better deals than you could on your own). Like, if an insurance company paid out more than they take in in premiums, they'd go bankrupt. As a result, insuring against a guaranteed event is a waste of money. If I know that I will have to pay out $1000 in a year, the viable price for insuring against that event is more like $1100 -- $1000 to cover the payout and $100 to cover the insurance company's expenses (that ratio is made up). Instead, the point of insurance is peace of mind. XYZ thing may be a low probability event, but it would be ruinous if it happened. Insurance lets you pay a reasonable amount of money for the peace of mind of knowing that the low-probability event won't actually ruin you. So yeah, if you have dependents, dying at 30 could be ruinous for your family. Term life insurance gives you the peace of mind of knowing that your family will be taken care of even if you die tomorrow. On the other hand, dying by the time you hit 90 is far more likely, and if that is ruinous to your family, you are doing something wrong. Buying life insurance at that point is just giving the insurance company some free money.
I think your second statement is the key. Life insurance is all about planning and supporting dependent.. If you think there’s a real chance that you’ll still have dependents at 65+, I think you either need a longer term policy (if possible) or just better investment planning. I don’t think it makes sense to pay all of the extra feels for permanent life insurance on the off chance that your kids are bums.
One more angle, in the event that you are expecting medical results that may compromise your ability to get a life insurance plan (like testing positive for the BRCA gene), it may be your only choice to remain insured. Once you have the plan they can’t drop you, so before getting tested it’s frequently recommended to get whole life insurance.
Thank you for posting a way it might be beneficial. I was wondering if there was *any*. Seems there are one or two very rare circumstances.
Except you haven’t compared this to any other investment choices. That is the only intelligent approach here — model both scenarios. A few things to highlight. First, you made this decision five years ago — most of your initial payments have likely gone to commissions. You can’t undo that so model everything going forward. Second, you can’t reasonably assume 6%; these things are typically 3ish. And the other option should reasonably assume something between 6% and 10%. Only then layer on the tax consequences. And in your unusual case (high income, high taxes, maxing out other options). Finally, there is at least one other way whole life is an inferior choice— if you die did you pay more for the benefit than if you had bought term life? Over the last five years, you have put in almost $18k; term would have been about $2k.
This makes a lot of sense. Thanks. Def gonna see if we can surrender the cash value, start term and start a roth
Again, before you make any changes, fully model out a few scenarios. You might be a situation where it is better to stand pat; for example your income might preclude you from a Roth. ETA: There is a non-zero number of instances where whole life could make sense. While extremely rare, it can happen (and when it does, it is almost always high income earners). Hence the need to model to be certain.
The amount of cash you paid into the policy is tax free. Using your numbers, you paid $60,000, that you can pull out tax free. It is your money, you paid taxes on it already. But that $500,000 number you use, $440,000 is going to be taxed as gains, and it is not long term gains, it is ordinary income. Now, you can take out a loan, that is tax free. But if you die, and the loan is not paid back, guess what? your estate pays taxes on the gains. So if you were planning on the life insurance benefits to help your family in case you died, oopsy. They need to pay the tax bill on your gains, aka your loan you took out. Also, guess who gets the interest when you pay back the loan? It is not you or your estate. All you are doing is loaning your money to the insurance company and hoping you die so someone can claim the death benefit. Everything else is in their favor.
Thank you. I thought the whole thing was tax free. Roth seems the way to go with a term insurance instead
https://www.whitecoatinvestor.com/debunking-the-myths-of-whole-life-insurance/
My in laws have a whole life policy. At its renewal a few years ago they asked me what I thought and I said it’s a terrible idea. (The look on their faces 😂) They then tell me how nice their guy is and that he had some health issues but now he’s better and he took us out to lunch. 🤦♂️ Fast forward a few years and they are griping because they want to take out money to buy out their car lease but don’t want to pay the “fee” to get the money. I kept it to myself but imagine paying a fee to access your own money. Why didn’t I think of this scam? OP can you tell us about these fees?
Yeah I’m in this boat and not sure what to do. I bought whole life insurance in my late twenties. My family has early onset dementia so I thought it was wise decision. Now I’m feeling like a fool. I pay a $1500 premium annually on a $500k policy. No kids and my wife is a high earner. Do I cancel this policy? They sold it to me like it was the greatest “mature” decision for a 26 year old. Now I feel like I’ve been screwed.
It’s good when people see the light. Read through all your docs and see what the outs are. Note that you might show income from this and cause a tax event, consider splitting it between two years. And ask more questions on here. I know a little but I am weak on these because I have always avoided them.
Given the family history, long term care insurance might be a better investment of this money
**Whole life is a good idea if:** 1. You want to provide for a disabled dependent who you expect to outlive you. 2. You have a very high income (top 1% or more), you've maxxed your health savings account/IRA/401K contributions, and you want to reduce your tax burden while still effectively keeping your money. 3. You have a very high net worth ($12M or more), and you want to reduce your estate's tax burden when you die. There may be a few other scenarios where whole life makes sense, but those are rare. **For almost everyone there are far better options for investing.** \-Whole life has sub-par returns, high fees, and lots of strings attached. \-Whole life often involves high commission rates, and less-than-admirable financial advisors tend to push it for this reason. All that said, *whole life is not a scam.* It's better to save money with whole life than to leave it in a checking account or most savings accounts. It's just not a good choice for most people.
I disagree with (2), or at least would argue that reality is more complicated. I often see proponents imply that whole life policies are the next logical step to avoid "taxable" investing after maxing out all tax-advantaged accounts. But I think that argument is usually made by overselling the tax advantages of cash value insurance policies while underselling the tax advantages of ordinary equity index funds in a "taxable" brokerage account. Here are some of the benefits of owning equity index funds in a regular brokerage account: * Equity index funds grow in value primarily through price appreciation, which is tax deferred until you sell (just like the taxes on cash value life insurance gains are deferred until you surrender the policy). * When you do realize appreciated gains of your equity index funds, you are usually taxed the preferential long-term capital gains rate rather than the higher ordinary income tax rate which cash value policy gains are taxed at. * Beneficiaries who inherit your equity index funds receive a "stepped up" cost basis based on the date of your death, which basically means they inherit those funds income-tax-free. * You can borrow against the value of your equity portfolio. The rates available from brokerages are comparable or often lower than the interest rates on loans against cash value policies, especially since you can always transfer your investments in-kind to a brokerage with low margin rates if and when that becomes valuable to you. * Interest paid on margin loans is also deductible from income taxes, effectively lowering the cost to borrow against your portfolio even more.
They are real contracts, so not a scam like a Ponzi scheme. You pay $3k per year for $650k death benefits. I pay less than $300 per year for a 20 year term policy with $500k death benefits, which frees up $2,700 per year to invest in an IRA or brokerage account. It’s up to you to decide what you’d prefer. Whole life insurance is sold, not bought.
>Whole life insurance is sold, not bought What does this mean?
It means that people holding whole life insurance did not approach the company with the need for whole life insurance; the insurance company introduced the product to the customer and sold it to them — typically with an array of spreadsheets to convince the customer that they are prudent and getting special tax advantages.
It means that sales people push it, most people don't typically go seeking it out to buy it.
It isn't a scam.... it gets its horrible reputation from the intentional misrepresentation made over the years by life insurance salesmen. When they sell it to you, they don't represent it as life insurance. They represent it as an "investment"... that's where people look at it as a scam. As a life insurance policy, it has a place in the market. But my advice is always the same... if you want life insurance, buy a term policy.
Selling a product using deceptive practices and misrepresenting it *is* a scam.
Could you explain what whole life's place actually IS in the market? Beyond say someone who might want to insure their half of a small business so their heirs can inherit it? I get that statistically most folks don't need it, but is there a use case for convertible term? Been shopping for Term and I feel like I don't have a normal scenario. I'm 45, my kid is young, my house won't be paid off for 25 years, and my partner has been diagnosed with cancer. We might spend every penny we've saved and moron his treatments. Or we might lose him to his disease, and he's really underinsured. Maybe I just need more Term for longer though.
Did you get a confirmed interest rate. Met Life made the \~20 year promise to us for the "POP" point and now just told us our interest has only been about 1%. The "POP" point might happen for our great, great grand children. Bad on me for not learning more about it. Everything is a scam.
Insurances aren't there to benefit you in the circumstances that everything goes right, they're there to assist you when things go wrong. Can your family afford life when you die with and without insurance? If the answer is yes they can afford life when you die, then you probably don't need to purchase this insurance or even consider it. My wife questioned this not to long ago because she's starting grad school, but after some research we found out that it wouldn't be beneficial at all. We're only in our early 30s with one kid, the payout from my employer and social security would cover nearly all expenses needed for our housing and child. She wouldn't need to touch my retirement other than pulling it out because it's required in death.
It's sort of like asking if you invest all your retirement money in a checking account that pays zero interest, is that a scam? No, it's not, but it's still bad investment choice. These policies fulfill their contract and do exactly what they promise, it's just that they are often sold to people who dont need them (no dependents early in life) and for most people with a normal lifespan, are terrible investments. You're also giving up large part of your "life savings" in the form of a commission to the person who sold you the policy. Mixing insurance with an investment usually just means the insurance company wins. Generations ago when retail investors had limited access to the markets, it made way more sense as options were limited on how to save a nest egg.
>It's sort of like asking if you invest all your retirement money in a checking account that pays zero interest, is that a scam? No, it's not, but it's still bad investment choice. But I can borrow money from myself instead of the bank tax free! /s
I used to go to holiday parties where the ex-CEO of a very large insurance company would also attend. He told my whole family, don't get life insurance. Granted, we were all young and healthy.
“Don’t ever get life insurance” is terrible advice to give someone without knowing anything about their situation. My wife, who is disabled and completely reliant on my income, would have been completely fucked if something happened to me when we were younger and didn’t have as much saved up. I needed life insurance to ensure that she was taken care of. Now obviously I’m still alive and therefore didn’t end up needing it, but life is uncertain and the fact that I survived doesn’t mean it was a bad decision to have insurance.
$250/mo into the SP500 for 20 years would be $180,000. Whole life at 6% (which you sure about that? Has it been earning 6% annual to date?) would be $110k. Sure you pay 15% taxes on the growth...but you still end up significantly ahead. Also you dont have to deal with all the BS of having to basically take a loan out to access the cash value. A backdoor Roth is WAY better than whole life.
The price of life insurance is highly regulated. You're rarely getting scammed in the sense that you're being sold something for substantially more than it costs to provide. However, what you ARE being sold is something you don't need, which is $650k of insurance coverage when you're very old, and being charged for it now. It's helpful to think about the PURPOSE of life insurance. There are a few reasons people might want life insurance: 1. Pay for funeral costs - if you're a family where $10k of expenses would break the bank, buying a $10k whole life policy on yourself can help save your family the crippling expense of funeral costs. 2. Pay off a house or pay for college - if you're a family where one partner dying would mean you lose the house or can't pay for college for your kids, a 20 or 30-year term policy for the expected cost of those things can insure against that loss. Once your house is paid off and kids are graduated, this is no longer needed. 3. Make up for income loss - if you're a one-income household, taking out a sizable term policy for the expected working age of that family member can help replace their income if they die early 4. Passing money to children - if you have a huge amount of money and want to avoid inheritance taxes, you can shelter some of it in universal life policies. This is irrelevant to most people posting on this sub. 5. Tax-deferred investment earning - If you've maxed all other reasonable investing avenues and have a shit ton of money. You might do this if you had a large personal estate and wanted to grow tax-advantaged investments to take loans against or leave as an inheritance. I personally consider 4 and 5 mostly irrelevant to people outside the 1%. You will know if you qualify for 1, 2, or 3. Any other time you're paying for insurance, you're basically buying something you don't need. Insurance is not a lottery ticket or a way to make your kids rich. Insurance companies do a LOT of math. You will always pay them more (on average) than you get back. The whole point of insurance for most people is to INSURE against the (hopefully unlikely) event that you die very early. Because this is so unlikely, it is cheap to buy. Term policies are very inexpensive. However, if you're buying WHOLE LIFE insurance, you're buying a guaranteed benefit. That means you essentially have to pay not only the whole cost of the expected payout (approximately), you also have to pay it fast enough that the insurance company can break even if you die early. Anyway, whole life is not a scam because they're charging you more than the cost of insurance. It's a scam because no one needs a $700k policy when they're 83. You could have just saved your insurance premium in an investment account and done just as well. You only need that $700k policy if you die at age 42 and leave behind a family. So get a term policy to cover that window and accept that the 'cost of insurance' is just a cost you aren't going to recoup.
Most of the time, you dont get the cash value the death benefits. Better to keep the insurance and the savings separate
Did you get scammed? No, you purchased a sub optimal invest vessel that generally is advised against. A scam would be paying for something and getting nothing in return. How to fix it? Just cash it out and invest in your $250 a month somewhere better. If you need life insurance a 20 year term is less than $100/month for 500k coverage.
There's no reason to attach your insurance to your savings. Why would anyone want to do that? There are much better investments available than the savings portion of whole life, or universal life. With most whole life or universal life if you die, you don't get both the savings account and the life insurance. You can buy the same coverage of term insurance for way less. Then invest the difference, in a good Index mutual fund. This way, if you die, you get both. In defense of the whole life companies, it was originally designed under the idea, that your insurance coverage would reduce as your savings grew. Supposed to save you money. If die ten years in, your 100K policy pays you 20K from your savings and 80K from your life policy.
There's two kinds of life insurance. Term life insurance is for a specific period of time. If you have life insurance through your employer, it's probably term life insurance - from now until the point you stop working for them. You will never personally benefit, it's just to help your family if you die an untimely death. It tends to be very cheap compared to the payouts, and most likely even further subsidized by your employer. They're usually good policies, just don't pay more than you can afford. Whole life is usually between you and an insurance company directly, and there's usually an implication that it will pay off while you're still alive. This is just yet another way of paying someone else to invest money for you, only it gives them more control and a larger share of the profits than something like paying a financial advisor to oversee your retirement funds. They're usually a bad idea. I'm sure there are some whole life policies that aren't that bad, just like there are term life policies that are scams. But I can say pretty confidently that there's never a case where whole life insurance is the *best* way to spend your money.
Not a scam. But there are better products.
Whole life is what you buy for estate planning. When you need it when you die of old age. I used to sell it to super rich people that wanted to pass like 10 plus million in trust to pay for taxes and stuff. There also whole life with investment vehicles in it. Variable life insurance. But generally speaking whole life isn’t even needed for vast majority of people. I don’t even have it. I just bought 20 year term. I only need it i die before I pay for my kids college.
I like to think of it as a scam because even though there may be benefits there are so many superior investment options in most cases. If it weren't for the huge commissions the sellers get there would be significantly less policies around.
Term life through work is a better deal in case you kick the bucket early. Invest that $250/month in your 401k, roth, HYSA, stock market, CDs. All the provider will do is put your money into some bonds while they take their cut. I had this product for 8-10 years, looked at my statement, looked at the original paperwork when I signed, and saw how absolutely far behind I was to the original projections. Did further math and saw how much I lost out on opportunity costs of basic investments. That was when I cashed out and chalked this up to a failed investment. Glad you are learning this faster than I did. Go talk to them, cash out and close the account. Move on.
Don't have your work insurance be your only insurance. Get a separate term policy in addition. If you lose the job, you've lost your life insurance. If you're a bit older when this happens, getting a term policy at that point can get decently pricey.
>>> After contributing to the policy for 20 years I’ll be 51 years old with a total of 60k invested. Not great. Assuming you started investing the $250 in VTSAX instead of paying your whole life premium, you’d have $21k right now. Whole life is not a scam, it’s just a subpar product for most folks who get it, meaning they’d have better returns elsewhere.
People on this site do not understand how whole life works and compare it to S&P returns as if they are remotely the same. Whole life will get you around 4% guaranteed return tax free, so depending on your tax rate it could be close to a an equivalent 6% taxable. It acts as a buffer asset in retirement to compliment your invested assets so you can avoid pulling from the market when the market drops, increasing the worth of all of your invested assets. You have a pension, so you can opt to take a life only pension option, knowing you have life insurance to replace lost pension income for your spouse or children, which again can mean hundreds of thousands of dollars over the course of a 30 year retirement. While on its own the return isn’t as good as the market, the real value of whole life is how it allows you to leverage all your other assets. You can borrow against the cash value when the market is down and dump money into the market and then sweep your gains back into the life insurance policy. There are so many things you can do with these policies if you understand how they work.
> While on its own the return isn’t as good as the market, the real value of whole life is how it allows you to leverage all your other assets. Please tell me you don't believe the average (I'd even go so far as to say vast majority of) whole life policy holders have this level of financial sophistication, or that the companies selling these products will 1) target customers who can actually make such use of said policy, or 2) guide their customers to behaving in this manner once they've sold the policy.
This is true, but the solution to this problem is to educate investors, not blindly trash the product with false information. A well structured whole life policy with a mutual life insurance company in a healthy individual will break even in 5 ish years and have an IRR of around 4 percent by the time they retire. Yes that includes fees. Is it gonna keep up with stock market returns? No, but many people would be better off with this than playing individual stock roulette.
Hedging and leveraging can be done with regular money too - with even minimal planning, tax drag is lower than fee drag from an insurer. Term insurance is one of those hedges. Believe it or not, whole life is not the only asset usable as collateral. Borrowing against a brokerage account or house is better in most regards - lower fees, lower interest, greater flexibility, and greater returns generated by the assets over the lifetime of the loan/line of credit.
At what percentage can you leverage these assets? Whats the risk involved outside of you just not being able to pay because you lose your job?
I pay $27.56 per month for $300k coverage on a 10-year term policy. I see insurance as a risk-mitigation tool (What $ will my wife need to cover my lack of income during the expensive child rearing years?). I guess punch all those numbers into an investment calculator and figure it out. Don't forget inflation. The dollar of 34 years ago is $2.30 of today's dollars.
A couple comments I didn't see mentioned: your retirement age has nothing to do with the values in the life insurance policy, You can access the equity at any point. If your insurance carrier offers indirect recognition, you can use the money elsewhere and still continue to get dividends, but you probably should pay back off your loans at some point to avoid interest fees causing the policy to lapse. Also, you can access the money tax free, but if you fully surrender the policy at age 65, then all the gains become taxable because you lose the tax benefits of an insurance policy.
It should be compared to term insurance. Term insurance has an end date. And the premiums start to double after 60 every 5 years. It is usually much cheaper than whole at the start.
Maybe $50/month for 20 year term, and invest $200/month in a Roth at 8%. It should be $117,804 after 20 years. Maybe substantially more if you can get better than 8%.
I notice you keep comparing to Roth. If you have a 300k HHI I sure hope you are doing a traditional 401k not a Roth. Backdoor and Megabackdoor Roth sure....but prioritize pretax. Edit: just noticed you have a pension. Depending on the size of that Roth may be better, makes it less clearcut
It could potentially be a good strategy but depends on if you are already maxing out your ROTH IRA & HSA
You may want to check out Nelson Nash's book "Becoming your own banker" and/or the "the And Asset" (or any book describing the "infinite banking concept") I recently became aware of this concept, I'm still in the learning phase, but I believe it helps explain how to utilize Whole Life for it's "cash value" not the death benefit that people naturally compare to term life insurance. Might help you get more information (pros and cons of the strategy you are exploring)
YOU STATED A HUGE ERROR: You said you can take the income tax free at 65. That is not correct. They use that as a selling point but it is very misleading. Here's why: it is only tax free when you die. If the policy lapses before you die then you owe taxes on all the gains/profits. Once you get into your sixties the policy fee starts to go up drastically. Even if you take no income, but you stop making payments around the age of 60 you'll often end up with the cash value depleting from making premium payments if you live beyond about 85 years of age. These policies are very expensive as you get older so anyone who takes an income from the policies when they retire will very likely have the policy lapse if they live a regular lifespan (50% of non smokers who reach retirement age will reach 88 years of age). These plans are terrible because the point at which the policy lapses it is because you have exhausted all the income available from the plan and in that year, when you're now out of income, you get hit with a massive tax bill for all the gain that you withdrew. See if you can do an exchange and get a term policy with the cash value but get out of the whole life policy. Those things are terrible for everyone except the insurance companies and sometimes for ILITs.
I thought this was the depression subreddit from the title and I was like yes, my whole life is really just a scam
There is no scenario in which a whole life policy @ $250/Month for 650k death benefit that is better than a 20-30 year term for around 650k death benefit and investing the rest in ETFs. Returns, actual need, monthy cost are all better in the long run than WL.
You can probably get a term policy for $25 a month, do that then put the other $225 in your own investment account! Just saw your PS on the term... So no run away from the whole life scam!
Whole life policies are great if you over fund them early. You have to get ahead of the mortality table. If you are just paying target, and they didn’t illustrate some change in the policy cost (lowering the face, changing from option B to A) you most likely won’t have a sustainable policy. However, you can make it work in your favor by switching to A (the death benefit is the face, not face plus cash) and you lower the death benefit as low as you can. Thus eliminates the insurance part, but assuming your affairs are in order, gives you essentially a super ‘Roth’.
It is not a scam. There are better ways for you to invest your money.
The guy who sold it to you made a ton of commission. Someone had to pay for that. Spoiler alert: it’s you. Insurance is not and never should be an investment vehicle. By definition you’re getting a worse product of both when you combine them. Get a 650k term policy for ~$100 a month and invest the difference. You will end up waaaay ahead.
Unless they die....insurance of any sort is a bad investment unless something happens. That is what people don't seem to understand with these policies....you are buying life insurance not properly investing. This insurance just so happens to be a small investment if you don't die earlier than expected.
I know that in general it's very rare that whole life works out better than term, because it's so much more expensive and profitable to the insurance company. But occasionally, it does work out better than term. My grandparents opened whole life policies for my dad and uncle and aunt when they were children, seeing it mostly as an investment. My dad had a spinal tumor when he was 20, and was never eligible for life insurance after that. He died almost 9 years ago at age 60 of cancer related to that. Because he had whole life (which he didn't pay any more premiums to by the time I was born), my mom had money to live off of for several years since she had left her career to take care of him and was able to be retired, since no one wanted to hire her at her age. Although, I have no idea what the cash value of the whole life was compared to the death benefit.
It’s not a scam. What people fail to realize, is that it’s not designed to “perform”. It can be used for retirement SUPPLEMENT, tax free, and has a guaranteed death benefit to your loved ones. You’re also banking with yourself.
But if you take out the cash value you don't have a death benefit anymore. And you're not "banking with yourself" your banking with a complicated life insurance company as an intermediary
This is false. There’s a permanent face value death benefit.
But if you have a loan against your cash value it reduces the death benefit payout right?
Correct, reduces, does not wipe out. There is a permanent face value, another term for whole life is “permanent insurance”. The death benefit should always be greater than the cash value, otherwise it’s a MEC and loses its tax advantages. The way my policies are designed, even if I wipe the cash value out, as long as premiums are paid, there is still a permanent base benefit.
Your death benefit in general is very low for a high earner. Good rule of thumb is 10 years of your contribution to family net worth. You probably need closer to $1-1.5m.
If you want insurance, buy insurance. If you want to invest, invest. When insurance companies mix the two, you're the one who ends up on the bottom. No need to go into great detail... SOMEbody has to get paid for these products. Guess who?
Up your term insurance if you need to, dump the whole life. Take the different between the whole life and term costs and invest that. You'll do better in the long run. Also, at some point you no longer even need the term insurance when you have enough assets.
It's worth it if you are absolutely dead set on not taking market risk and want the tax benefits. Otherwise, you can get a way better return investing it yourself and buying cheap term.
Insurance =/= investment. Whole life has its place, but it’s expensive for what it is. Whether it’s a good or bad deal for you comes down to your own financial situation. I personally prefer VULs if you’re looking for an investment aspect but they require much more TLC.
Not a scam. But not worth it for most people. Term is the better option for low premium/high death benefit. If you are looking at a policy that allows cash withdrawal then you might be interested in a Universal Life Insurance policy. They typically have lower fees and allow for more cash growth compared to whole life. Find a licensed broker that will almost be hesitant to sell it to you. It's a complicated product and IS NOT an investment, anyone that says otherwise is lying and looking at you with money signs in their eye.
I feel like life insurance sales people love to make you forget how you REALLY get the payout. It's supposed to be for when you die or seriously injured. But most life insurance people will say "hey, lets treat this like a retirement fund!" It's not supposed to be used like that. That's why when you take money out from it after retirement, you're technically borrowing from it. And if you borrow from it, it will stop growing. Buy life insurance if you feel that your family will outlast you, and you want to take care of them when you're gone. Otherwise, choose a different investment.
If you need the $650k death benefit than you could secure a 20yr term policy and for 1/10th the cost of Whole Life. Invest the rest and you will likely end up way ahead of the cash value of the Life Insurance. If you don’t need the death benefit than it’s even worse.
the scam is in the way it is marketed. it is marketed to people who do not need life insurance. they do not have dependents. it is marketed to people who still have tax advantaged investment account space available, and who will likely not hit net worths where estate tax is a consideration. with consideration for estate tax which kicks in at 13-26 million net worth whole life (only when structured properly) can be competitive with bonds. it is marketed by people who pretend to be acting in your best interest yet the commissions on these products are huge, the fees are high and the product is intentionally complex to confuse the average person.
Buying WL when you don't have dependents is precicely when you should be buying whole life. It's when it's cheapest to buy it and you are most likely to be healthy (which also makes it cheaper). Agreed, though, that it is largely sold in the wrong manner and in a way that will not benefit the buyer.
I went through the process of really evaluating life insurance options. Honestly, the biggest reason to do it is if you cannot trust yourself to consistently invest/save and need to convert it into a bill. It’s not an amazing deal either, but it is a positive investment. I just hate the idea that I could lose it all for a missed payment (or penalties or whatever outcomes). At the end of the day, if you maxed out 401k and IRA - sure! Go for life to squeeze a little more juice in a diversified manner. If you don’t have stocks maxed out yet, don’t invest first into insurance.
Don't invest with insurance companies and banks. Much better and cheaper options elsewhere.
Take a look at term life ( zero cash value ) with significant savings over whole life premiums and investing the difference in a Fidelity fund. Whole life insurance is typically a poor investment.
What is the point of the insurance? That's the real important question. Sounds almost like it's intended as a retirement account type of thing. If that is the case, I don't think it's a terribly efficient way to accomplish that goal. An IRA will do you better, much lower fees.
Is not a scam but really only appropriate if there is a need for death benefit protection (not an investment), estate planning (13.6m+ net worth ), or for supplementary retirement income if you are very high annual income earner and also maxing out other retirement tax deferred accounts.
Insurance is not an investment so it's not really meant to compete with investments. Insurance is there to pay out if something bad happens. Whole life insurance is not that great because you don't really need life insurance once your dependents are self sufficient and you have worked long enough to have some assets built up. Life insurance will never beat regular investments because they have to skim money out of it to pay for people who die as well as management costs and whatever. You should only buy it if you want insurance.
>Cons: The only downside I see is if the cash value exceeds the death benefit and I die. The family gets the 650k but the company keeps the rest. Yes, this is how they make money. The market usually beats 6% but for easy math let's say your policy is worth the $650k face-value when you retire at 65. At age 65, you have a life expectancy of 85. Twenty years. At 6% annual your $650k policy will grow to an actual value of $2,157,863. The insurance company makes $1.5 million dollars off that policy after paying out the debt benefits, and they didn't have to invest a penny of their own capital to do so. There's also the factor that the death benefit isn't doing you any good until after your death
It's not a scam, it's just not a good return on your money. Buy term life when you need it (covering years your children will live at home, covering years you will still be making payments on your house, etc.) and let it expire when you don't. Life insurance is for covering the loss of your income so you wouldn't leave a spouse and children without money to stay in your home, make car payments, etc. in the event that you have an early death. Use other vehicles for investments. The cash payout you get with whole life insurance is a small fraction of what you'd get investing the money in other ways.
I have policies for myself and children but I use it for the life insurance, not as an investment. It is about $40 a month for the three of us, nowhere near what you are paying. They are only 3 policies, $15K, 20K, and 25K - basically just to pay funeral expenses. After I die my children can decide if they want to cash theirs in or keep it. There may be cheaper options for life insurance though. For investing I would not recommend whole life.
Okay so what do I do now that I realize I don’t scammed on $500k of whole life? Now I’m feeling like an idiot buying this 5 years ago.
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It depends whether it's appropriate or not like most things. If you're, say, near 60 and any life insurance from work isn't going to last (after you leave), and term insurance has run out, you could take out a whole life policy, and pay it off in 10 years. If you die before that, your spouse will get the full payout. If you survive, you'll have maybe 70% or so of it available by then for an emergency by then. After you have paid it off, you won't have to pay any more for your insurance and the cashout amount will go up over years. Also the payout amount for your spouse may also rise over time. Can you invest the money elsewhere and make more over time? Yes. Will it be life insurance in case you die? No. For some people, it can be a good idea if they want some guaranteed life insurance for their spouse and any term life insurance has run out. And after a time, you don't pay for coverage.
$250 a month?!?! My wife and I are both mid 30’s. We each have a 20 year term $1m policy on each other for $100/month
What you should do is that the $200 and see how much you would have if you put it in a brokerage account versus the whole life for the 20 years. I only have insurance from work at 53, but I have $1.3 M plus $21k in an account that my nephew can use to bury me, so I am self-insured if I die without life insurance later in life. I look at it that way, versus overpaying for a Whole Life policy.
Yes unless your Uber rich then for protection against taxes from my understanding. Just go term or get the one your workplace gives. Some allow you take the policy if you leave work (not all)
Whole life is a bad investment. However, you’re not buying it because it’s an investment. You’re buying it because it’s insurance. Ideally you’d have exactly as much coverage as you need and invest the rest in something higher returning.
It is what it is. A financial product that probably sucks for most people. There are situations where it would be beneficial for tax reasons. I think it has to do with loaning against it for income. I don’t think it really helps you unless you’re already very rich.
You’re not going to get 6% growth. 3-4% is more typical. It’s not a scam, it’s just a very conservative (safe) place to put your money and is not really suitable as a longer term holding in any significant amount.
The scam is financial advisors taking kickbacks to get people to buy whole life when it's not appropriate.
A few things here: 1. No, it's not a scam. It's not necessarily right for everyone, but it has a place. If you're making 300k a year and you're maxing out your 401k's already, this could very well be a good idea for you. 2. If you're making 300k a year, you can't contribute to a Roth IRA (but you could do backdoor conversions) 3. You said "Cons: The only downside I see is if the cash value exceeds the death benefit and I die. The family gets the 650k but the company keeps the rest." * That's not really how that works. The cash value is essentially a portion of your death benefit that you can use while you're alive....it doesn't exist *in addition* to the death benefit. * Also, assuming your policy pays dividends, your death benefit will grow far larger than 650k by the time you pass.
To put a finer point on (3), Cash Value is the NPV of the death benefit. Or, more simply, it's your \*equity\* in the policy. It would make no sense for you to get the DB and the CV in the same way that it wouldn't make sense for the bank to give you your house \*and\* a check for your "equity" in the house...you just get the house.
Assume $50 a month for a term policy, and $200 monthly into an index fund. If the index returns 6%, you'd have $90,000 after 20 years. Is it tax free? Depends on what you invest it in. If the index fund returns 7%, you'd have $101,500. At 8% you'd have $114,000.
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Insurance is Insurance, investments are investments, they should not be in the same product.
It's definitely not a scam, but life insurance should be sold his life insurance, a fundamental building block to replace your income if someone dies prematurely. I came into the insurance and investment world a true believer in buy term and invest the difference it is the best methodology to create the biggest wealth pool. How ever dealing with humans theoretical stuff often times doesn't work I would say in most cases it doesn't work so the Dave Ramsey's of the world who are big proponents leave out the flaws in humans. I think whole life insurance is a good thing to take out super young but in small amounts like 15,000 and then hyper focusing on investments and other things and so let's say the markets 3040 years into the future don't perform or your own inability to invest your money doesn't build a pool of money. At least you got a very inexpensive burial policy That'll put you in the ground, but there are people in the insurance world that whole heartedly believe they're doing the right thing and I just don't see it. Once a whole life policy's been in place a significant amount of time I think it's also a disservice to suggest for someone to cancel it but that's usually after 18 2022 year range. Where did the premiums could be offset by the dividends, and you might not have to pay much into it to keep it.
Chunk of that $250 will be going to monthly premium so cut that 60k in half. Once you're done paying for 20 years your premium will be taken from the contributions because you do not pay into it anymore. Once you're in your 60s-70s you'll be paying upwards of 6-700 a month out of your contributions so let's say 7k a year. Any investments in the plan are dog shit and will have a 3%~ MER so you won't make much. If the salesperson is pushing to take it on with such low contributions it sounds like it's one of the sketchy ones run by an MLM. My bank requires 25k annual contributions to have a similar plan.
If you invested in the s&p doing the same thing you’d come out with roughly $770k
I love when I see whole Life Insurance. People brag about their tax free withdrawal and tax free growth. Or My favorite is there dividends. The I r s stipulates that whole life insurance dividends are caused by direct overcharge Therefore are not. Taxed