Anyone here listen to the Lab Coat Agents podcast? I was listening to one this morning (https://podcasts.apple.com/us/...) and the guy was talking about putting your money into whole life insurance company's general funds. He said they guarantee a 4% return and that you can borrow against it very easily. I actually heard something very similar recently from an agent in my area. This is news to me, but is this something anyone else is familiar with?
@Shaun R. be careful, whole life is 15-20x more expensive than term for the same pay out upon death (ie death benefit) but they are usually structured so the *Insurance Company Keeps* the savings component of the policy upon your death that you’ve been paying extra to build up. It’s not an efficient financial product imo especially when you can borrow against better performing investments (ie retirement accounts, taxable brokerage accounts, etc.) Buy term insurance, save the difference and invest in something else with a better return. 4%? No thanks. Is there anyone who recommends whole life insurance policies besides insurance salesmen? Maybe a Financial Planner on BP can weigh in? I’ve heard they can serve a purpose for a very small % of very wealthy individuals but can’t remember how exactly.
Hey Brian, here’s a little clarity on some of the things you brought up:
1) fair warning I am a degenerate life insurance agent.
2) Whole Life is more expensive than term (albeit not generally 15-20 times - usually more like 4 times) for 2 reasons:
- It is guaranteed to pay out. Traditional term policies don’t get issued out past the age of 85 for a reason. That’s when the average person passes away. Over 95% term policies will never pay out. It is not the most cost effective way to get lifetime protection. There is a product called a GUL that offers the long term protection with reduced cash values for a savings in cost.
- Building cash value. Cash value is beneficial. Why buy stocks when options are less expensive? They’re different products for different purposes. There’s value in the extra money a stock brings.
3) Is it really more expensive? I’ve done the math before. The average life insurance client takes out 7 life insurance policies over the course of their lives. Comparing the cost of one 20 year term policy to one whole life policy isn’t honest. If you insure yourself from age 20-80 that’s 4 20 year policies. Before you say you’ll be self insured, my average clients age 60 and that person is most often looking for another 10-20 year term policy (most are surprised they can’t get an off the shelf 30 year).
If you’re healthy and young you can get $500k for around $30/month. You can’t if you’re 60. Someone age 60 looking for a term policy in average health will pay $380/month (it can cost much more depending on health). If you average that cost over the course of 60 years it works out to around $147,600. That is just cost. For something over 95% of people will never see a return on.
4) 4% guaranteed interest for a dividend earning WL policy is the minimum amount a policy will pay. WL companies with dividends find ways to pay competitive ones.
5) Life insurance is not primarily an investment. I didn’t liquidate my rentals to buy more WL. I promise, I’m here for more than just following around Joe Splitrock. I’m here because I’m an active real estate investor. Permanent life insurance is a hedge. What if I die? What if I get sick? What if I need supplemental income when I retire? You can take out as many IRAs and brokerage accounts as you want. They won’t pay a death benefit. You die tomorrow and your family only has what’s in the account- hopefully it’s not a bad year. Hopefully I had enough money to feed it. If I have partners hopefully my wife can afford to pay them off if she doesn’t want to work with them.
6) Most financial planners collect a commission. Their commission (unlike an insurance agent) is based on your assets managed. They make way more off investment accounts than they do life insurance. I had another agent tell me that a financial planner hired him to find out how to liquidate a clients life insurance policy. The agent explained it wasn’t in the best interest of the client, the financial planner told him he didn’t care - he just wanted the funds under management. They have just as much bias as an insurance agent if not more (unless they’re fee only - they’re still just sales people). Keep in mind during your CFP there are no classes on real estate. If an agent properly structures your policy for cash value accumulation they’re actually taking a significant discount on commissions.
Which begs another question- who learns the ins and outs of the life insurance business for free? I’ve read a lot of articles and listened to a lot of podcasts about life insurance by people who are not agents and every single one has had factual errors.
Yes, life insurance agents as well as financial planners, auto mechanics, lawyers, bartenders, real estate agents, property managers, doctors, and the guy at Best Buy are all sales people. These are people that are compensated for being experts at what they do. We’re no different. It takes a lot of work to be good at what I do. You can’t buy a life insurance policy without someone earning a commission. If I get arrested I’m not going to google a legal blog, I’m going to hire a lawyer. We are legally responsible for our recommendations that we make.
7) I don’t recommend WL to all of my clients. This might be surprising. When a client comes to me with a need my recommendation is based on the best interest of the client, not my commission. Strangely Enough people talk about the commissions on WL policies. I make way more money from term policies. Term insurance is a cash cow for insurance companies because it rarely gets used. The profits from that go to paying WL dividends. For clients that do get WL policies we maximize them for growing cash value A WL policy off the shelf doesn’t do that.
8) Life insurance companies steal your cash value - not completely true. A WL policy has two parts. Cash value and an insurance component. The policy is designed for the insurance component to pay the difference between your cash value amount and the death benefit. The policy would be more expensive if you wanted both. Like I said before, if you simply want a death benefit until age 121, there’s cheaper ways to do it.
9) You didn’t ask about taxes, but you invoked rich people and retirement accounts. Retirement accounts and specifically RMDs (especially for beneficiaries after a death) can cause real tax problems- God forbid you have a kid trying to find college when you pass and they have to take RMDs. The tax-free nature of life insurance policies. Wealthy people- life insurance is an easy way to transfer wealth.
10) I almost forgot- borrowing from retirement accounts and brokerage accounts. Assuming you're not trying to suggest someone can borrow from an IRA- the process is much easier from a life insurance policy, no required payment schedules, and you don't have the 50% borrowing limit. Borrowing from IULs can be incredibly inexpensive as well. Suggesting that IULs or WL policies have low growth is just not true. Lower returns than market investing? Sometimes, not all the time. WL and IULs don't lose money. Once you get paid a dividend the company can't take it back because they had a bad year the following year. Speaking of 4% guaranteed- where else can you get that kind of interest (assuming you forget about the additional dividend payments) guaranteed?
Hope that was helpful despite the fact I’m a good-for-nothing sales person. 😉
This headache inducing thread is the main reason I will not ever consider anything other than a simple term life policy (which I have). Anything this complex is not good for consumers. Think about it. Why would an industry create this much complexity for a supposedly high value product? Term life is simple. You pay a premium, you die, beneficiary gets face amount. Nothing more or less. A simple risk transfer transaction, which is what insurance means. Whole life is so hard to unravel, and I have an engineering PhD and dealt with complex contracts for decades in the business world. All the smoke and mirrors is not there for my benefit for sure. And also, if insurance was so good, why is the name so toxic that Insurance Salesmen now call themselves Financial Advisors? Even car salesmen haven't had to change their title!!
@John Perrings thanks for your reply. To answer your question: I store my cash in cash-flowing assets that appreciate. I would much rather self insure my whole life by making wise investments 😉
Yes. That's why my RE clients love life insurance. It's a cashflowing asset that leverages the law of large numbers to insure their lives and then leverages the present value of the death benefit to buy additional cashflowing assets ;)
This headache inducing thread is the main reason I will not ever consider anything other than a simple term life policy (which I have). Anything this complex is not good for consumers. Think about it. Why would an industry create this much complexity for a supposedly high value product? Term life is simple. You pay a premium, you die, beneficiary gets face amount. Nothing more or less. A simple risk transfer transaction, which is what insurance means. Whole life is so hard to unravel, and I have an engineering PhD and dealt with complex contracts for decades in the business world. All the smoke and mirrors is not there for my benefit for sure. And also, if insurance was so good, why is the name so toxic that Insurance Salesmen now call themselves Financial Advisors? Even car salesmen haven't had to change their title!!
The only thing toxic is this irrational fear of life insurance.
Regarding the idea of "Simple." How many peoples' very first real estate transaction was simple for them? How many books did they read on the subject before they bought their first investment property? How many courses did they pay for?
Is it really so out-of-the-question to consider that it might take more effort than reading an internet post to understand how life insurance cash value can improve the efficiency of real estate transactions?
Anyone who is PhD smart(!) should pretty easily see the benefit in owning a guaranteed, tax-deferred cash ASSET that allows you to:
1) Leverage the law of large numbers to indemnify your family against the loss of your income *and,* at the same time;
2) Leverage the present value of your *permanent* death benefit (aka the cash value) to buy real estate assets *and,* also in the future;
3) Leverage the future value of your *permanent* death benefit to strategically offset and/or reduce the amount of tax you'll pay, thereby increasing your income and the use and enjoyment of your other assets while you're still alive
Does anything about the above sound toxic?
But instead of being open-minded about how that could work for them, many people on here would rather opine about insurance agent commissions. ...as if they themselves are not in an industry that that has sales agents who earn commissions on sales lol
Yes, here no one complains about the 6% commission for Realtor who were only there to open the door for a visit :-)
Yes, here no one complains about the 6% commission for Realtor who were only there to open the door for a visit :-)
Lol fair enough :D
This headache inducing thread is the main reason I will not ever consider anything other than a simple term life policy (which I have). Anything this complex is not good for consumers. Think about it. Why would an industry create this much complexity for a supposedly high value product? Term life is simple. You pay a premium, you die, beneficiary gets face amount. Nothing more or less. A simple risk transfer transaction, which is what insurance means. Whole life is so hard to unravel, and I have an engineering PhD and dealt with complex contracts for decades in the business world. All the smoke and mirrors is not there for my benefit for sure. And also, if insurance was so good, why is the name so toxic that Insurance Salesmen now call themselves Financial Advisors? Even car salesmen haven't had to change their title!!
The only thing toxic is this irrational fear of life insurance.
Regarding the idea of "Simple." How many peoples' very first real estate transaction was simple for them? How many books did they read on the subject before they bought their first investment property? How many courses did they pay for?
Is it really so out-of-the-question to consider that it might take more effort than reading an internet post to understand how life insurance cash value can improve the efficiency of real estate transactions?
Anyone who is PhD smart(!) should pretty easily see the benefit in owning a guaranteed, tax-deferred cash ASSET that allows you to:
1) Leverage the law of large numbers to indemnify your family against the loss of your income *and,* at the same time;
2) Leverage the present value of your *permanent* death benefit (aka the cash value) to buy real estate assets *and,* also in the future;
3) Leverage the future value of your *permanent* death benefit to strategically offset and/or reduce the amount of tax you'll pay, thereby increasing your income and the use and enjoyment of your other assets while you're still alive
Does anything about the above sound toxic?
But instead of being open-minded about how that could work for them, many people on here would rather opine about insurance agent commissions. ...as if they themselves are not in an industry that that has sales agents who earn commissions on sales lol
Real estate transactions are simple. You don't need mentors or training or anything to buy a house. You choose a house, get a mortgage and buy it. Yes there is a ton of paperwork and CYA forms thrown at you by the agent but in reality it makes no difference to the transaction. You still get title to the house and can sell it as well. Sure you pay the commissions. I don't like them and I think agents have an unhealthy lock on the system but I can very simply calculate the cost of the fees into my transaction. Compare that to life insurance with a hundred moving variables. Guaranteed rate, term, death benefit, dividend, tax deferral etc etc etc. all of which are controlled by the company. Essentially the idea is that I give up control of my money to the company so I get the "benefit' of being able to borrow some of it back. But that money comes out of the death benefit anyway. In addition to that I have to pay for the insurance part at a rate much higher than term and high fees. Why not just keep control of my money, accumulate wealth, self insure and have a shorter term life policy to cover the gaps? Im sure there are worse investments than Whole Life but there are sure as hell a lot better ones too.
This headache inducing thread is the main reason I will not ever consider anything other than a simple term life policy (which I have). Anything this complex is not good for consumers. Think about it. Why would an industry create this much complexity for a supposedly high value product? Term life is simple. You pay a premium, you die, beneficiary gets face amount. Nothing more or less. A simple risk transfer transaction, which is what insurance means. Whole life is so hard to unravel, and I have an engineering PhD and dealt with complex contracts for decades in the business world. All the smoke and mirrors is not there for my benefit for sure. And also, if insurance was so good, why is the name so toxic that Insurance Salesmen now call themselves Financial Advisors? Even car salesmen haven't had to change their title!!
The only thing toxic is this irrational fear of life insurance.
Regarding the idea of "Simple." How many peoples' very first real estate transaction was simple for them? How many books did they read on the subject before they bought their first investment property? How many courses did they pay for?
Is it really so out-of-the-question to consider that it might take more effort than reading an internet post to understand how life insurance cash value can improve the efficiency of real estate transactions?
Anyone who is PhD smart(!) should pretty easily see the benefit in owning a guaranteed, tax-deferred cash ASSET that allows you to:
1) Leverage the law of large numbers to indemnify your family against the loss of your income *and,* at the same time;
2) Leverage the present value of your *permanent* death benefit (aka the cash value) to buy real estate assets *and,* also in the future;
3) Leverage the future value of your *permanent* death benefit to strategically offset and/or reduce the amount of tax you'll pay, thereby increasing your income and the use and enjoyment of your other assets while you're still alive
Does anything about the above sound toxic?
But instead of being open-minded about how that could work for them, many people on here would rather opine about insurance agent commissions. ...as if they themselves are not in an industry that that has sales agents who earn commissions on sales lol
Real estate transactions are simple. You don't need mentors or training or anything to buy a house. You choose a house, get a mortgage and buy it. Yes there is a ton of paperwork and CYA forms thrown at you by the agent but in reality it makes no difference to the transaction. You still get title to the house and can sell it as well. Sure you pay the commissions. I don't like them and I think agents have an unhealthy lock on the system but I can very simply calculate the cost of the fees into my transaction. Compare that to life insurance with a hundred moving variables. Guaranteed rate, term, death benefit, dividend, tax deferral etc etc etc. all of which are controlled by the company. Essentially the idea is that I give up control of my money to the company so I get the "benefit' of being able to borrow some of it back. But that money comes out of the death benefit anyway. In addition to that I have to pay for the insurance part at a rate much higher than term and high fees. Why not just keep control of my money, accumulate wealth, self insure and have a shorter term life policy to cover the gaps? Im sure there are worse investments than Whole Life but there are sure as hell a lot better ones too.
You’re simply wrong about giving up control of your money. Whole life insurance is a unilateral contract that puts the insurance company on the hook. You can access cash via dividends, loans, partial, or full surrender anytime you want. As I said before, it’s a liquid, cash asset.
Anyone who has used a home equity line of credit, is already familiar w the “benefit” of borrowing money against the cash value of the policy. It’s the exact same concept that most people find “beneficial” when building up equity in a property.
You are also still missing the point about leverage. You can have guaranteed growth in life insurance AND buy properties at the same time with the same money.
This headache inducing thread is the main reason I will not ever consider anything other than a simple term life policy (which I have). Anything this complex is not good for consumers. Think about it. Why would an industry create this much complexity for a supposedly high value product? Term life is simple. You pay a premium, you die, beneficiary gets face amount. Nothing more or less. A simple risk transfer transaction, which is what insurance means. Whole life is so hard to unravel, and I have an engineering PhD and dealt with complex contracts for decades in the business world. All the smoke and mirrors is not there for my benefit for sure. And also, if insurance was so good, why is the name so toxic that Insurance Salesmen now call themselves Financial Advisors? Even car salesmen haven't had to change their title!!
The only thing toxic is this irrational fear of life insurance.
Regarding the idea of "Simple." How many peoples' very first real estate transaction was simple for them? How many books did they read on the subject before they bought their first investment property? How many courses did they pay for?
Is it really so out-of-the-question to consider that it might take more effort than reading an internet post to understand how life insurance cash value can improve the efficiency of real estate transactions?
Anyone who is PhD smart(!) should pretty easily see the benefit in owning a guaranteed, tax-deferred cash ASSET that allows you to:
1) Leverage the law of large numbers to indemnify your family against the loss of your income *and,* at the same time;
2) Leverage the present value of your *permanent* death benefit (aka the cash value) to buy real estate assets *and,* also in the future;
3) Leverage the future value of your *permanent* death benefit to strategically offset and/or reduce the amount of tax you'll pay, thereby increasing your income and the use and enjoyment of your other assets while you're still alive
Does anything about the above sound toxic?
But instead of being open-minded about how that could work for them, many people on here would rather opine about insurance agent commissions. ...as if they themselves are not in an industry that that has sales agents who earn commissions on sales lol
Real estate transactions are simple. You don't need mentors or training or anything to buy a house. You choose a house, get a mortgage and buy it. Yes there is a ton of paperwork and CYA forms thrown at you by the agent but in reality it makes no difference to the transaction. You still get title to the house and can sell it as well. Sure you pay the commissions. I don't like them and I think agents have an unhealthy lock on the system but I can very simply calculate the cost of the fees into my transaction. Compare that to life insurance with a hundred moving variables. Guaranteed rate, term, death benefit, dividend, tax deferral etc etc etc. all of which are controlled by the company. Essentially the idea is that I give up control of my money to the company so I get the "benefit' of being able to borrow some of it back. But that money comes out of the death benefit anyway. In addition to that I have to pay for the insurance part at a rate much higher than term and high fees. Why not just keep control of my money, accumulate wealth, self insure and have a shorter term life policy to cover the gaps? Im sure there are worse investments than Whole Life but there are sure as hell a lot better ones too.
You’re simply wrong about giving up control of your money. Whole life insurance is a unilateral contract that puts the insurance company on the hook. You can access cash via dividends, loans, partial, or full surrender anytime you want. As I said before, it’s a liquid, cash asset.
Anyone who has used a home equity line of credit, is already familiar w the “benefit” of borrowing money against the cash value of the policy. It’s the exact same concept that most people find “beneficial” when building up equity in a property.
You are also still missing the point about leverage. You can have guaranteed growth in life insurance AND buy properties at the same time with the same money.
But then what's in it for the Insurance company? They are not a charitable organization right? And they didn't get those big fancy buildings by giving away their control and money! This is the problem. I like deals where I can see how it all works out for everyone, with transparency. Whole life is the antithesis of that. And again, if it is really such a magical wonderful thing, why then does it have such a shady reputation along with those who sell it? Why do Life insurance agents call themselves Financial Advisor, not Insurance Agent. Do they really do holistic financial advice? Are they RIA? Do they have fiduciary responsibility to their clients? Too many red flags. Maybe I am wrong and missing out the deal of the century by not putting a million dollars cash into a whole life policy. I guess I will just have to live with it..
This headache inducing thread is the main reason I will not ever consider anything other than a simple term life policy (which I have). Anything this complex is not good for consumers. Think about it. Why would an industry create this much complexity for a supposedly high value product? Term life is simple. You pay a premium, you die, beneficiary gets face amount. Nothing more or less. A simple risk transfer transaction, which is what insurance means. Whole life is so hard to unravel, and I have an engineering PhD and dealt with complex contracts for decades in the business world. All the smoke and mirrors is not there for my benefit for sure. And also, if insurance was so good, why is the name so toxic that Insurance Salesmen now call themselves Financial Advisors? Even car salesmen haven't had to change their title!!
The only thing toxic is this irrational fear of life insurance.
Regarding the idea of "Simple." How many peoples' very first real estate transaction was simple for them? How many books did they read on the subject before they bought their first investment property? How many courses did they pay for?
Is it really so out-of-the-question to consider that it might take more effort than reading an internet post to understand how life insurance cash value can improve the efficiency of real estate transactions?
Anyone who is PhD smart(!) should pretty easily see the benefit in owning a guaranteed, tax-deferred cash ASSET that allows you to:
1) Leverage the law of large numbers to indemnify your family against the loss of your income *and,* at the same time;
2) Leverage the present value of your *permanent* death benefit (aka the cash value) to buy real estate assets *and,* also in the future;
3) Leverage the future value of your *permanent* death benefit to strategically offset and/or reduce the amount of tax you'll pay, thereby increasing your income and the use and enjoyment of your other assets while you're still alive
Does anything about the above sound toxic?
But instead of being open-minded about how that could work for them, many people on here would rather opine about insurance agent commissions. ...as if they themselves are not in an industry that that has sales agents who earn commissions on sales lol
Real estate transactions are simple. You don't need mentors or training or anything to buy a house. You choose a house, get a mortgage and buy it. Yes there is a ton of paperwork and CYA forms thrown at you by the agent but in reality it makes no difference to the transaction. You still get title to the house and can sell it as well. Sure you pay the commissions. I don't like them and I think agents have an unhealthy lock on the system but I can very simply calculate the cost of the fees into my transaction. Compare that to life insurance with a hundred moving variables. Guaranteed rate, term, death benefit, dividend, tax deferral etc etc etc. all of which are controlled by the company. Essentially the idea is that I give up control of my money to the company so I get the "benefit' of being able to borrow some of it back. But that money comes out of the death benefit anyway. In addition to that I have to pay for the insurance part at a rate much higher than term and high fees. Why not just keep control of my money, accumulate wealth, self insure and have a shorter term life policy to cover the gaps? Im sure there are worse investments than Whole Life but there are sure as hell a lot better ones too.
You’re simply wrong about giving up control of your money. Whole life insurance is a unilateral contract that puts the insurance company on the hook. You can access cash via dividends, loans, partial, or full surrender anytime you want. As I said before, it’s a liquid, cash asset.
Anyone who has used a home equity line of credit, is already familiar w the “benefit” of borrowing money against the cash value of the policy. It’s the exact same concept that most people find “beneficial” when building up equity in a property.
You are also still missing the point about leverage. You can have guaranteed growth in life insurance AND buy properties at the same time with the same money.
But then what's in it for the Insurance company? They are not a charitable organization right? And they didn't get those big fancy buildings by giving away their control and money! This is the problem. I like deals where I can see how it all works out for everyone, with transparency. Whole life is the antithesis of that. And again, if it is really such a magical wonderful thing, why then does it have such a shady reputation along with those who sell it? Why do Life insurance agents call themselves Financial Advisor, not Insurance Agent. Do they really do holistic financial advice? Are they RIA? Do they have fiduciary responsibility to their clients? Too many red flags. Maybe I am wrong and missing out the deal of the century by not putting a million dollars cash into a whole life policy. I guess I will just have to live with it..
There are plenty of entities that I'm sure you deal with every day who have "big buildings." In fact, if you are a policy owner with a mutual insurance company, you are part owner of the mutual company inside that "big building."
By the way, call up the investor relations dept of any big company in one of those big buildings and ask for their annual report. Read that report and gaze in wonder at the large amounts of life insurance those companies buy for their executive compensation plans. Same thing with Banks. Banks own billions of dollars of life insurance. Bank Owned Life Insurance (BOLI). BOLI makes up a significant portion of a bank's tier 1 capital.
I wonder why?
It has guaranteed growth, it's liquid, tax-deferred, has creditor-protection, and earns a respectable rate of return.
Many people appreciate having guaranteed growth in one area of their financial life so that they can take some risk in other areas.
And no one said you had to "put a million dollars" into it. But if you had a million dollars, depending on what you want out of life, willfully ignoring a 200-year old, tried-and-true financial product such as life insurance, based on some opinions you've heard, seems a little irresponsible.
This headache inducing thread is the main reason I will not ever consider anything other than a simple term life policy (which I have). Anything this complex is not good for consumers. Think about it. Why would an industry create this much complexity for a supposedly high value product? Term life is simple. You pay a premium, you die, beneficiary gets face amount. Nothing more or less. A simple risk transfer transaction, which is what insurance means. Whole life is so hard to unravel, and I have an engineering PhD and dealt with complex contracts for decades in the business world. All the smoke and mirrors is not there for my benefit for sure. And also, if insurance was so good, why is the name so toxic that Insurance Salesmen now call themselves Financial Advisors? Even car salesmen haven't had to change their title!!
The only thing toxic is this irrational fear of life insurance.
Regarding the idea of "Simple." How many peoples' very first real estate transaction was simple for them? How many books did they read on the subject before they bought their first investment property? How many courses did they pay for?
Is it really so out-of-the-question to consider that it might take more effort than reading an internet post to understand how life insurance cash value can improve the efficiency of real estate transactions?
Anyone who is PhD smart(!) should pretty easily see the benefit in owning a guaranteed, tax-deferred cash ASSET that allows you to:
1) Leverage the law of large numbers to indemnify your family against the loss of your income *and,* at the same time;
2) Leverage the present value of your *permanent* death benefit (aka the cash value) to buy real estate assets *and,* also in the future;
3) Leverage the future value of your *permanent* death benefit to strategically offset and/or reduce the amount of tax you'll pay, thereby increasing your income and the use and enjoyment of your other assets while you're still alive
Does anything about the above sound toxic?
But instead of being open-minded about how that could work for them, many people on here would rather opine about insurance agent commissions. ...as if they themselves are not in an industry that that has sales agents who earn commissions on sales lol
Real estate transactions are simple. You don't need mentors or training or anything to buy a house. You choose a house, get a mortgage and buy it. Yes there is a ton of paperwork and CYA forms thrown at you by the agent but in reality it makes no difference to the transaction. You still get title to the house and can sell it as well. Sure you pay the commissions. I don't like them and I think agents have an unhealthy lock on the system but I can very simply calculate the cost of the fees into my transaction. Compare that to life insurance with a hundred moving variables. Guaranteed rate, term, death benefit, dividend, tax deferral etc etc etc. all of which are controlled by the company. Essentially the idea is that I give up control of my money to the company so I get the "benefit' of being able to borrow some of it back. But that money comes out of the death benefit anyway. In addition to that I have to pay for the insurance part at a rate much higher than term and high fees. Why not just keep control of my money, accumulate wealth, self insure and have a shorter term life policy to cover the gaps? Im sure there are worse investments than Whole Life but there are sure as hell a lot better ones too.
Stating that life insurance is too complicated is simply a cop out. You simply can't get past your bias against life insurance. I have no idea what spawned it or why you hold on to such issues, but you are flat out wrong.
A permanent life insurance policy is not a complicated product. Since the insurance company KNOWS that they will have to pay a claim some day, part of the premium goes into a savings component. The cash value is basically the policy owner saving up the death benefit over the insured's expected lifetime. And as that savings steadily grows and compounds over time, the insurance company has to pool resources to cover the delta between the death benefit and the cash value. The risk is slowly transferred from the insurance company to the policy owner. The insurance company is quite literally buying term and investing the difference. Only they can do it much more efficiently than you can.
And here's what everyone forgets: The cash value belongs to the policy owner. If they surrender the policy, it is returned to them. How can it be "expensive" if it is your own money?
As for the leverage, that is pretty simple too. As I've repeatedly showed throughout this post, if you can get a loan against your policy's cash value and use that loan to invest in real estate, you can put your money to work in two places at one time: The Double Play. You will build wealth faster by putting your money into a properly-designed life insurance policy and leveraging the cash value to invest in "A" than simply taking your money and investing in "A".
If you, with your PhD, cannot understand the business model, that's on you. It works regardless of what you may think or can comprehend.
You are also confusing minimally-funded, traditional Whole life policy with the maximum over-funded, cash value monsters that we use for real estate investors. Death benefits and commissions are held to an absolute minimum.
@John Perrings thanks for your reply. To answer your question: I store my cash in cash-flowing assets that appreciate. I would much rather self insure my whole life by making wise investments 😉
Yes. That's why my RE clients love life insurance. It's a cashflowing asset that leverages the law of large numbers to insure their lives and then leverages the present value of the death benefit to buy additional cashflowing assets ;)
I've never personally met a RE investor who has a Whole Life Insurance as an integral part of there investment strategy nor have I met one who has said that's how they became wealthy or rich, ie by investing in WL. Perhaps it is the Big Boys, ie the Uber Wealthy that utilize this strategy? I'm not your customer but I really do appreciate your thoughts and the other FAs who have weighed in. And while I absolutely appreciate the need for risk transfer in different areas of life, ie insurance, I've had way too many experiences with insurance companies to believe that they have my financial best interest at heart. I have trust issues.
@John Perrings thanks for your reply. To answer your question: I store my cash in cash-flowing assets that appreciate. I would much rather self insure my whole life by making wise investments 😉
Yes. That's why my RE clients love life insurance. It's a cashflowing asset that leverages the law of large numbers to insure their lives and then leverages the present value of the death benefit to buy additional cashflowing assets ;)
I've never personally met a RE investor who has a Whole Life Insurance as an integral part of there investment strategy nor have I met one who has said that's how they became wealthy or rich, ie by investing in WL. Perhaps it is the Big Boys, ie the Uber Wealthy that utilize this strategy? I'm not your customer but I really do appreciate your thoughts and the other FAs who have weighed in. And while I absolutely appreciate the need for risk transfer in different areas of life, ie insurance, I've had way too many experiences with insurance companies to believe that they have my financial best interest at heart. I have trust issues.
That’s cool. I would just make sure you’re not throwing the baby out w the bath water. Circles back to your comment on price: you do get what you pay for.
@Brian G. I have met those who use it. Whole life itself is not what you become wealthy on but you can use it for other things that you do. Just like tax strategies and other things like that you normally use it for once you have money not to get money.
@Account Closed
A little surprised at your answer considering I have read a lot of your stuff and you are normally fairly sophisticated. I am not going to argue for or against insurance. Its situational just like legal or tax items. However, some of the things you are pointing out are way off base. Its a gigantic industry so of course there is a lot of bad acting and bad reps. The same can be said about equities, derivatives, etc. etc. Most of those by the way are also complicated, come with bad reps and are not generally understood by many.
As for transparency, there are very clear disclosure rules. Yes it's very complicated and yes many agents try and make it more complicated to hide what is in it for them.
You are also not wrong (and this is just an opinion I know many might disagree) that on its own merits whole life might not be worth it if all you want is insurance, esp if you are not high income or have a lot of liability exposure. Term is easier to understand and many times it is cheaper.
What you are missing though, in my opinion, is that insurance, for whatever reason, has some very unique advantages in what you can do with it. This has nothing to do with insurance. Yes you will end up paying the piper (the salesperson, the insurance company etc.). The insurance company I don't think is too complicated its basically risk-based pricing. Insurance companies are some of the most sophisticated companies in the world on risk pricing. Most also reinsure it so there is a cost there but also protection if there is a disaster.
The commission structure can be more complicated and is more opaque. However, if say you have a tax rate of 40% to 50% (in CA or NY fairly typical) it can be very advantageous and outstrip the costs. Not saying run out and get it, I think there are other strategies that work too esp for RE, but it is definitely more interesting than you give it credit for, at least for those who are high net worth or high income. I would also note that most of those RE tax strategies are at least as complicated and fraught with fees, middlemen, etc. in some of the structures used like DST, etc.
There are also liability advantages.
To me, insurance is just a contract you can put some interesting stuff into. It has a cost and that cost is sometimes worth it, sometimes not. It is a lot more interesting than you imply though in my opinion.
@Charles Worth interesting. Maybe I will be able to wrap my brain around it someday.
@Shaun R.
Shaun, I would be very careful to buy any whole life insurance at all. Whole life insurance is a financial product where the insurance agent ( aka financial advisor) gets thousands of dollars if you sign up. 4% is a terrible return long term. My advise to you is to buy index funds from Vanguard or fidelity. As an example, I used to have a financial advisor (even this fiduciary financial advisor wouldn’t dare offer me whole life- just as FYI about how poorly seen this is in certain circles). I realized that I was being charged too much for investing my money- they really don’t do much at all, just put money in an account and buy funds. I ditched them and opened an account at vanguard. Even with my very conservative portfolio my rate of return is about 7%. I told my husband to put all his retirement from previous job at vanguard in VTSAX index fund US stocks since he is more risk prone and he still has 30 years to retirement. His return is so far 12%. On average I would say 9% is adequate. Thus please do not buy whole life. If you want to invest buy index funds and then get term life insurance. Term life insurance is very cheap va whole life. So, buy cheap term life insurance and invest the rest in index funds. You will thank me I’m a few years.
Good discussion and lot of opinions like so many topics.
I thought I would throw my MUCH simpler experience with Permanent Insurance and why I think it is a legit product. I should add that it is through a Fraternal Organization (Thrivent).
I have a policy that is "pre 1984" so a little different MEC rules to my understanding. One of the earlier benefits of it was when my inlaws were doing estate planning they gave us a large sum of money, around 200K. We were able to put that into my policy where it is NOT counted on the FAFSA for when my kids went to college. This helping them be eligible or about 90K of grants and scholarships. About the only from of assets that are not on FAFSA are retirement accounts and Cash Value Life Insurance. It also provided 800K of life insurance paid for out of the returns (no premium needed) and a 6-7% return at the time, or double what CDs were. We wanted to preserved these funds if they were ever needed for the inlaws care.
Since getting divorced and my wife getting those funds back I left 15K of cash value in their. I consider it par t of my emergency fund also, that would normally just be in a money market account of something similar. It still provides 100K of insurance by using part of the returns for paying the premium, and also has about 4% return on TOP of that. I am 54 now, and it will pay that premium until I am about 69 without taking the cash value down. I also have the benefits of guaranteed purchase options and converting my Term Insurance, that I also have at Thrivent, over TO that policy if I choose to at what the rates would have been at the time I took out the Term Policy.
I dont really see a downside to it myself, in moderation.
@Shaun R.
Shaun, I would be very careful to buy any whole life insurance at all. Whole life insurance is a financial product where the insurance agent ( aka financial advisor) gets thousands of dollars if you sign up. 4% is a terrible return long term. My advise to you is to buy index funds from Vanguard or fidelity. As an example, I used to have a financial advisor (even this fiduciary financial advisor wouldn’t dare offer me whole life- just as FYI about how poorly seen this is in certain circles). I realized that I was being charged too much for investing my money- they really don’t do much at all, just put money in an account and buy funds. I ditched them and opened an account at vanguard. Even with my very conservative portfolio my rate of return is about 7%. I told my husband to put all his retirement from previous job at vanguard in VTSAX index fund US stocks since he is more risk prone and he still has 30 years to retirement. His return is so far 12%. On average I would say 9% is adequate. Thus please do not buy whole life. If you want to invest buy index funds and then get term life insurance. Term life insurance is very cheap va whole life. So, buy cheap term life insurance and invest the rest in index funds. You will thank me I’m a few years.
You should read the other posts in this thread. Comparing life insurance to your investment portfolio is comparing apples and oranges.
Also - I think it's funny when people bring up their "fiduciary" financial advisor and their only advice is to take on risk. Then they turn around and try to say *guaranteed* life insurance products are terrible.
Term insurance is a liability
Whole Life Insurance is an asset
(*Not* bashing term insurance. Many people have both)
And sales commission-bashing is a strawman argument. Whole life insurance cash value and death benefit growth are NET of all costs, including commissions.
@Brian G. I have met those who use it. Whole life itself is not what you become wealthy on but you can use it for other things that you do. Just like tax strategies and other things like that you normally use it for once you have money not to get money.
@Account Closed
A little surprised at your answer considering I have read a lot of your stuff and you are normally fairly sophisticated. I am not going to argue for or against insurance. Its situational just like legal or tax items. However, some of the things you are pointing out are way off base. Its a gigantic industry so of course there is a lot of bad acting and bad reps. The same can be said about equities, derivatives, etc. etc. Most of those by the way are also complicated, come with bad reps and are not generally understood by many.
As for transparency, there are very clear disclosure rules. Yes it's very complicated and yes many agents try and make it more complicated to hide what is in it for them.
You are also not wrong (and this is just an opinion I know many might disagree) that on its own merits whole life might not be worth it if all you want is insurance, esp if you are not high income or have a lot of liability exposure. Term is easier to understand and many times it is cheaper.
What you are missing though, in my opinion, is that insurance, for whatever reason, has some very unique advantages in what you can do with it. This has nothing to do with insurance. Yes you will end up paying the piper (the salesperson, the insurance company etc.). The insurance company I don't think is too complicated its basically risk-based pricing. Insurance companies are some of the most sophisticated companies in the world on risk pricing. Most also reinsure it so there is a cost there but also protection if there is a disaster.
The commission structure can be more complicated and is more opaque. However, if say you have a tax rate of 40% to 50% (in CA or NY fairly typical) it can be very advantageous and outstrip the costs. Not saying run out and get it, I think there are other strategies that work too esp for RE, but it is definitely more interesting than you give it credit for, at least for those who are high net worth or high income. I would also note that most of those RE tax strategies are at least as complicated and fraught with fees, middlemen, etc. in some of the structures used like DST, etc.
There are also liability advantages.
To me, insurance is just a contract you can put some interesting stuff into. It has a cost and that cost is sometimes worth it, sometimes not. It is a lot more interesting than you imply though in my opinion.
Charles, great post. I like the way you explained this:
"Whole life itself is not what you become wealthy on but you can use it for other things that you do."
But regarding commissions: any good agent will not try to hide their commissions. It's really not complicated nor opaque. All of my clients know exactly how, and how much, I get paid.
If it's a concern for people, instead of shying away from it, just contact some agents and ask them if they will share how they get paid. It's really not a big deal.
In my experience, people have been trained by the financial entertainers out there to think that insurance commissions are crazy high. But what they don't understand is the value brought to the table is crazy high!
I've never had anyone have any concern about commissions, whatsoever, because I prove to them that the value of the strategies is there.
Good discussion and lot of opinions like so many topics.
I thought I would throw my MUCH simpler experience with Permanent Insurance and why I think it is a legit product. I should add that it is through a Fraternal Organization (Thrivent).
I have a policy that is "pre 1984" so a little different MEC rules to my understanding. One of the earlier benefits of it was when my inlaws were doing estate planning they gave us a large sum of money, around 200K. We were able to put that into my policy where it is NOT counted on the FAFSA for when my kids went to college. This helping them be eligible or about 90K of grants and scholarships. About the only from of assets that are not on FAFSA are retirement accounts and Cash Value Life Insurance. It also provided 800K of life insurance paid for out of the returns (no premium needed) and a 6-7% return at the time, or double what CDs were. We wanted to preserved these funds if they were ever needed for the inlaws care.
Since getting divorced and my wife getting those funds back I left 15K of cash value in their. I consider it par t of my emergency fund also, that would normally just be in a money market account of something similar. It still provides 100K of insurance by using part of the returns for paying the premium, and also has about 4% return on TOP of that. I am 54 now, and it will pay that premium until I am about 69 without taking the cash value down. I also have the benefits of guaranteed purchase options and converting my Term Insurance, that I also have at Thrivent, over TO that policy if I choose to at what the rates would have been at the time I took out the Term Policy.
I dont really see a downside to it myself, in moderation.
Thank you for sharing! I do a lot of my cash value work with a Fraternal company as well. I find they can do things with dividends others can’t.
You make a great point about conversion rights! People often call me after their conversion period on their term coverage is over looking for more. The end of your conversion period is one of the most important pieces of information when you have a term policy. I’ve saved people thousands by converting an existing term policy instead of having to write a new term policy.
The conversion period should be a serious consideration for anyone buying a term policy.
I do this and it help me float my liquidity as I wait for 50k syndications. I don't think its for people under 500k net worth as those people should invest every penny than to pay 20% to fees but for Accredited investors it makes total sense.
Thank you @Charlesa F. The guy in the podcast referred to the Rockefellers doing this strategy multiple times. I'm going to check the book out.