Does Whole Life ever make sense for high incomes?

[molar roller]

Wondering if I should look into whole life, continue what I'm doing, or something else entirely.

 

A little about me - 46 year old, general dentist in solo practice for 18 yrs.  2 kids, one in college, one in HS.  Wife is 49, an RN by training but left her job a year ago and not planning to go back any time soon.

The practice has grown nicely, and provides me with substantial income.   It varies, but is generally around $1.3-1.4M/yr, give or take.  Our expenses are relatively modest, and our savings rate is about 50% of the pre-tax income.  I max out all the qualified retirement options, including 401k, profit sharing, safe harbor, cash balance, HSA, 529, backdoor Roth, but  obviously there are still substantial funds left over.  I've been on auto-invest program since my first check out of residency 20 years ago, and so these excess funds are automatically invested into various passive index mutual funds twice a month.

The portfolio is 60% taxable/40% after tax (plus college funds that I don't include in the calculations), invested at 85/15 equity/fixed.  If I were to sell the practice now, the total would probably be sufficient for an immediate retirement.  I don't plan to do it just yet, but maybe in 2 yrs when the younger child finishes high school.

I am highly risk tolerant, although I have't been tested at these portfolio levels yet.  If there is a real crash, I'm not sure how I would react if I'm sitting on a couple of million dollars of paper losses.

Considering that, I'm wondering if I should look into something other than index funds.

I've looked into whole life insurance, and the salesman certainly painted  a rosy picture, but everything I've heard about WL/VUL insurance has been negative.

I've also been pitched various annuity products but again, I've been told to stay away from those.

However, I'm wondering if an insurance product of some sort might be a useful addition to the portfolio.

 

Given my situation, is there any insurance/annuity/anything else that might make sense?

[Peds]

molar roller wrote:

I am highly risk tolerant, although I have’t been tested at these portfolio levels yet.  If there is a real crash, I’m not sure how I would react if I’m sitting on a couple of million dollars of paper losses. Considering that, I’m wondering if I should look into something other than index funds.

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well no, first re-evaluate your AA based on your need/willingness/ability to take risk.

in the next crash expect to lose about ~40% of your portfolio at your current AA.

molar roller wrote:

but everything I’ve heard about WL/VUL insurance has been negative.

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because it is.

molar roller wrote:

However, I’m wondering if an insurance product of some sort might be a useful addition to the portfolio.

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probably not yet but once you get into estate planning levels then maybe a different discussion.

[Faithful Steward]

molar roller wrote:

Given my situation, is there any insurance/annuity/anything else that might make sense?

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99% of the time, term insurance is the right answer. However, given your income, you might be one of the 1%.

Permanent life insurance, whether whole life, variable life, universal life, or indexed life, can make sense in the following situation:

• You have maxed out all other tax-advantaged investment opportunities, like 401(k)s, IRAs (Roth or Traditional), HSAs, and the like.


• You have steady reliable income with which to fund your policy each and every year.


• You are currently in a high tax bracket and plan to be in a fairly high tax bracket during your retirement years.


• You would like to generate tax-free income during retirement with the added benefit of having some death benefit available to address potential estate or inheritance tax issues.

If you find yourself in this situation, then using life insurance to create retirement income might be right for you.

Keep in mind, that if you're using life insurance as a retirement vehicle, you want to make sure that your advisor showing you and overfunded policy. What that means is that you're buying the smallest death benefit possible for the amount of premium you are willing to commit to the plan. This is exactly the opposite of what you are looking to do when you're purchasing life insurance for the death benefit.

[molar roller]

Peds wrote:

molar roller wrote:

I am highly risk tolerant, although I have’t been tested at these portfolio levels yet.  If there is a real crash, I’m not sure how I would react if I’m sitting on a couple of million dollars of paper losses. Considering that, I’m wondering if I should look into something other than index funds.

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well no, first re-evaluate your AA based on your need/willingness/ability to take risk.

in the next crash expect to lose about ~40% of your portfolio at your current AA. the portfolio.

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Thanks for your reply.  Yes, I realize how much of the portfolio value will be lost in the crash.  I think I'll be able to take the risk, just saying this ability hasn't been tested yet.  I've been through crashes before, starting with dot com, and have lost 40% of the portfolio - but it was never this much.

[Hank]

Whole life is unlikely to make sense. I would recommend a cash balance plan, but you’re already doing that.

Have you considered opening another location? Adding an associate to cover days or hours when you currently aren’t open? You’re paying rent or mortgage for 168 hours per week even if you’re only open from 9-5 Monday through Thursday.

Do you own the building for your practice? If not, that could be another good use of funds and a potential tax play. You also could either sell the practice building or collect rent in retirement.

[molar roller]

Thank you Peter, very helpful.  I have 7 yrs left on a 20 yr term policy, which I will just let lapse, as the kids are almost grown and whatever I may leave them if I die would be more than the policy.

 

Hank, I am busy enough with one location  -what would I do with another one?  Double the stress, double the headaches - and if it's double the money, all that would do is increase my savings rate

Buying the building is not an option, unfortunately.

[EntrepreneurMD]

Molar, we are in a very similar position in many aspects including age, income and savings rate. I too have a dilemma with the extra cash compounding into my accounts annually.

I looked heavily into whole life, but couldn't swallow the $37K/year premiums for the policy. However I may have still done it had I not found another more attractive option for me.

As Hank eluded, there are other options to consider. After considering a number of them, I ultimately went with the commercial real estate for fixed rental incomes, tax savings on the interest debt and closing costs, tax deferment thru depreciation, and hopefully appreciation of the property over the coming decades. With strong cash reserves, I put a large down payment so that the real estate holding company was cash flow positive from year one.

One disadvantage versus life insurance may be the investment is not as passive, and of course tenants are not guaranteed (so far so good).

Hank, opening a second location seems to be relatively difficult in health care, and I have seen many failures with this. It can certainly work, but to reproduce your success elsewhere with employed providers is generally difficult unless you are willing to give up ownership interest in the business so colleagues feel like partners and even then they need to have the right skill set. What I did was build a building large enough by design to take over tenant spaces as they move out if I need the space (I'm already an existing tenant there in my suite), or even open other businesses within the space that would complement my primary medical business - I would have a closer eye on a business/employees across the hall. I learned a lot of this coming from a multispecialty group in one building that took up a city block. However I happen to be in an area where there are more than enough customers to grow a business in one location for my working lifetime, may not be possible in other areas and so there are definitely times when second locations make sense, and has been done successfully. As you eluded, I am considering evening and weekend hours to further optimize benefit from the existing space and a competitive edge. That's a great idea if one can juggle employee schedules.

I too am averse to a large market portfolio given the age of the current bull. I think Hank is eluding to the added option of investing more resources in our businesses and the property that houses them as business owners. In the end, it's all about the best of hopefully many options and the amount of work we are willing to put into that option.

OP, wish you continued success!

[ZZZ]

"generally around $1.3-1.4M/yr, give or take. Our expenses are relatively modest, and our savings rate is about 50% of the pre-tax income"

You're saving $700k/yr and have been for at least a couple years at the peak of saving judiciously for 20 years. Quit wasting time talking to salesman who are trying to take a chunk of your success for themselves. Given asset allocation and annual savings, you must be well into 8- figure net worth territory. You've won, enjoy life.

[molar roller]

Thank you Entrepreneur.  RE is definitely a consideration.  I don't have the knowledge or the skillset to do it on my own, but I have teamed up with friends who've had success in this field.  We've bought several single family houses over the past year or so, but it's been going slow.  As there are a lot of us in the group, the investments have been small.

 

ZZZ - not into 8 figures yet... and by my calculations, would need to maintain this pace for at least 4 years to get there.  That's a lot of tooth dust   will probably bail out before I hit that level.

[afan]

Considering the low dividend rate on VTI, low tax rates on dividends and lt gains, there is not much to accomplish by avoiding these taxes. A combination of VTI and VTEB will produce a low tax rate. Not worth paying a fortune in fees to avoid it.

Real estate might be worth it, if you either have time to learn to do it yourself pr have good managers at good prices. Hard to diversify without a lot more capital.

[ajm184]

afan wrote:

Considering the low dividend rate on VTI, low tax rates on dividends and lt gains, there is not much to accomplish by avoiding these taxes. A combination of VTI and VTEB will produce a low tax rate.

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Ageed, taxable is the way to good IMO, even if it is Muni's.  You control the investment, most importantly the sale (taking gains/loses) and the tax implications also. Taxable gives you control (buy/sale, amount, taxes) versus WL which has high fee, poor returns, and mixes insurance and investing.

[Kamban]

molar roller wrote:

e total would probably be sufficient for an immediate retirement. I don’t plan to do it just yet, but maybe in 2 yrs when the younger child finishes high school.

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molar roller wrote:

I am highly risk tolerant, although I have’t been tested at these portfolio levels yet. If there is a real crash, I’m not sure how I would react if I’m sitting on a couple of million dollars of paper losse

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If you have been investing for 20 years, you should have been tested by the 2000 and 2008 crashes. And if you have come through you should come through though the amount of current investment is high compared to the past.

Most recessions last <2-3 years. So why not save for that much amount of living expenses in cash / bonds / real estate with rental income so that you can live off those while letting your equities recover in that time frame. The reality is that even if a crash occurs you will die a wealthy man and live inheritances to your children.

Oh, and avoid whole life like the plague.

[Infinity]

I would consider life insurance if it can be used as a vehicle to reduce estate taxes. However, I am not an insurance expert.  You have time before your net worth gets above 22M.

If you don't like real estates, and have high risk tolerance, I would continue to invest in stock indexes.  I also lost >40% during 2000 crash.  It was very painful.

You are now in much better financial position.

If market drops by 50%, there will be a lot of people who will be suffering more than you.

If you have 10M in stocks and it goes up 10%/yr, that 1M gain is better than your current earning of 1.3M and paying 40%+ in taxes.

[StarTrekDoc]

SOR protection if you don't have anything else to produce a baseline minimum within your portfolio that you're not drawing upon during the negative times.

[molar roller]

Part of the reason for the aggressive allocation is that 25-30% of my net worth is in my practice - which will be sold upon retirement.  That will result in a massive cash position which can provide for at least 5-7 years of retirement.  So I am not particularly worried about the market tanking when I retire, and having to draw on the portfolio during tough times.

 

What is SOR protection?