The Pay Day Loan of the Middle Class: Whole Life Insurance


Whole life insurance policies are not suitable for the majority of the population. Due to the enormous conflict of interests in the insurance world, the worst policies pay the agents the highest commissions; heads you lose, tails they win.

The worst part of this policy is this damning fact: 80% of the individuals who purchase this product get rid of it prior to death. In other words, most people who buy these policies end up dropping them because they can no longer afford the expensive premiums and are left with nothing.

Basically you pay a monthly or annual premium in exchange for a guaranteed payout to your beneficiaries when you die. According to The White Coat Investor, “Since every whole life policy is guaranteed to pay out if you just hold on to it to your death, the premiums are much higher than a comparable term life insurance policy.”

We have experience with many clients who have come to us vastly under-insured due to misleading tactics of conflicted salespeople. They were sold a bill of goods. They were promised this product would take care of both their investing and insurance needs. In reality, it takes care of neither.

If you have a family with two young children that needs insurance coverage for the next 15 years, these policies are completely inappropriate. For example, if you are earning $100,000 annually, you would need a policy that would pay out about $1.5 million, at minimum. The cost of a whole life policy that would provide this benefit would end up being tens of thousands of dollars in yearly premiums; too expensive for 99% of us.

We have met with young families with whole life policies with death benefits of $150,000. The cost?  A few thousand dollars in yearly premiums.

This would cover maybe one or two years of needed expenses, then what? They were left in a very dangerous position by unscrupulous agents.

Our solution is to take the cash balance in their current policy and complete a 1035 tax free exchange in to a low-cost variable annuity. This money can now grow in a tax-deferred manner and will have higher returns due to the lower costs. (Yes annuities do have some value occasionally.)

We then direct them into a low-cost 15-20 year term life policy which will cover their insurance needs. The premiums are also considerably cheaper so the family will have more money to stash away in tax-deferred accounts, like a 401(k) or 403(b) which lowers their taxable income.

It’s amazing what can be done when advisors are actually looking out for their clients’ best interests instead of pushing unsuitable products in order to collect the highest possible commission.

What about the promise of the terrific investment returns from the whole life policy? We have a tremendous amount of experience in the 403(b) space for public school teachers. We know first-hand what happens when people decide to commingle their investments and insurance. High-cost and low-return variable and market index annuities are textbook examples of all the bad things that can happen when insurance and investments are mixed into a toxic brew.

Here is why the idea that whole life insurance will provide a great investment return is a myth conjured up by commission hungry salespeople. According to The White Coat Investor:

“When you pay your whole life premiums part of the money goes toward buying insurance, part of it goes toward overhead and profit for the insurance company, and part of it goes toward the commission for the salesman.  The rest then goes into the cash value portion of the policy.

Each year, the insurance company declares a dividend, and if there is $10,000 in the cash value portion and the dividend is 6%, then $600 gets credited to your cash value.  The dividend is only applied to the cash value, not the entire premium paid, so the average dividend rate is in no way, shape, or form related to your actual return on the policy as an investment.

In fact, the return on investment is generally negative for at least a decade. I recently analyzed a policy for a healthy 30-year old male with a 53-year life expectancy.  The guaranteed return on the cash value was less than 2% per year after five decades.  Even if you use the insurance company’s optimistic “projected” values, you’re still looking at a return of less than 5%.”

Even worse many of these policies will be pushed upon you by inexperienced and unqualified friends or relatives that have been coerced by insurance companies to take advantage of their “social networks.”

The bottom line is there are over 400,000 insurance agents in this country. Far too many of them are pushing products that will benefit their retirement, not yours.

Caveat Emptor.