Another Example of Whole Life Being Sold Inappropriately

[The White Coat Investor]

Tons and tons of examples of whole life insurance being sold inappropriately are buried deep in the comments sections of several-year-old posts and in my email box. I thought it might be a good idea to bring a typical one to light where it would be seen by more people.

Lam posts a comment: Should I dump my whole life policy?

As he supplied more details, it became clear that selling him the whole life policy was the equivalent of financial malpractice. Too bad you can't prosecute that.

• Face Value: $500K


• Income (now, not when it was sold): $94K/year


• Debts: Student loans and a mortgage


• Premium: $471/month ($5,652 per year, or 6% of his income)


• Total paid over 6 1/2 years: $37,680.00


• Current cash value: $22,252.00


• Return: ~ -14% per year


• Need for a permanent death benefit: None

I quote:

A colleague was talking about her financial was taken care off in the golden age with retirements and life insurance. She introduced her adviser and he gave me the whole sales pitch. I was 26 and the whole thing sounded wonderful. So I bought into it...it was not because of high return or need a permanent death benefit when I got it. It was just an awesome sales pitch and I knew nothing about investing. I have 1mil term life as well – yup he sold me on that as well with the pitch of convert to whole.

INSURANCE AGENTS: QUIT DOING THIS!

DOCTORS (AND EVERYONE ELSE): QUIT FALLING FOR THIS!

In order to get a $3-5K commission, this insurance agent cost this guy $15K + another $15K in opportunity costs. He would have been better off just handing this guy his first year's premium and walking away.

Drives me nuts. I'm so thankful my whole life "stupid tax" only cost me a few hundred dollars, although my 7 year return was almost twice as bad as his.

[conniebird]

I'm in the women's MD finance group on facebook and soooo many of them were sold and bought whole life insurance. I'm seriously amazed how many people buy it without really knowing what it is. Most realize it was bad and are so angry and sad.

Also amazed how many of them have "financial advisors" that sold them said whole life insurance, sometimes OVER having them fund their retirement accounts!!

[DarrVao777]

I'm always reminded of my first "financial advisor" when I hear these stories.

An ingenious woman who had a deal with the local medical society so she could obtain the names of new doctors and see if they are freshly graduated (read: easy targets)

I remember agreeing to meet her after work after she approached my office (I was curious as to what this financial advisor could offer) and could barely suppress my smile when I realized her advisory services were solely limited to pitching whole life to me.

Luckily, I had already stumbled upon WCI's website and book prior to completing training. Blocked her email, blocked her number, end of story.

[Shamwow]

I had an acquaintance tell me he was a financial advisor.  I asked him if he did 529 plans (as I was unsure how to start one).  He said he would get back to me.

He got back to me with a whole life policy(or universal, or variable something or other) as the idea for a college savings account... I was kind of speechless... I pointed out to him after looking at it that when my child was ready for college, that the value of the policy was still LESS than I had contributed, that I would have been better to shove that money under the mattress....  His solution:  Have her take out student loans to allow the policy to get past the break even point...............

I do not ask this person for financial advice anymore.

THANKFUL TO HAVE WCI TO ALLOW ME TO THINK THROUGH THE SALES PITCH!!!

[TheAbacus]

My wife got enrolled (unknowingly, I suspect) in an employer recommended GVUL plan. The good news is that the premiums are paid entirely by the employer. My wife (serendipitously) did not make any "investment" contributions to this.

Since she's changing jobs in mid 2017, I guess we'll cash out and walk away. Bullet dodged, thanks to our ignorance / good fortune!

[The White Coat Investor]

TheAbacus wrote:

My wife got enrolled (unknowingly, I suspect) in an employer recommended GVUL plan. The good news is that the premiums are paid entirely by the employer. My wife (serendipitously) did not make any “investment” contributions to this.

Since she’s changing jobs in mid 2017, I guess we’ll cash out and walk away. Bullet dodged, thanks to our ignorance / good fortune!

Click to expand...

I ran into something like that. It was being pitched as a "Roth IUL" to the employer and doctors. Obviously there is no such thing as a Roth IUL.

[climbhigh]

I just purchased a 30yr term life insurance plan, but the agent tried to "up-sell" me to the whole life plan. His argument was one I had not heard before (or maybe I had read it somewhere but didn't pay any attention to it). His argument is to assume I retire with a certain amount of assets. Assume whatever your safe withdrawal rate is, ~2-4%. He argued that I could take all of my assets and buy a single premium annuity that would pay more than just 3 or 4%, thereby allowing me to use more of my money in retirement for my enjoyment. Indeed, a quick search shows me I can get an annuity for life starting at age 65 that would pay me the equivalent of a 7% withdrawal rate. But since I've "given away" all my assets at that point, thats where the whole life plan comes into play so that when I die there would still be something left for my family. Again, maybe this argument is well known but it was new to me..

[The White Coat Investor]

Pretty weak argument in my view. I also think it is dumb to annuitize all your assets.

But it is true that you can spend more safely from an annuity than anything else, but at the cost of having nothing left behind to use for yourself or to leave to heirs.

So what is likely to do better than whole life for that need? Oh, simple index funds. Here's how it works.

Agent's Suggestion:

1. Invest 3/4 of your assets into a portfolio


2. Invest 1/4 of assets into whole life insurance


3. At retirement, annuitize the portfolio and leave the insurance for a tax-free inheritance.

My Suggestion:

1. Invest 100% of your assets into a portfolio


2. At retirement, annuitize 75% of it.


3. Leave the other 25% for heirs to inherit tax-free at a step-up in basis (or better yet as a stretched traditional or Roth IRA.)

Now it just comes down to rate of return. Do you expect your portfolio to return more than a whole life policy over the remainder of your life? Of course. So that's the smart thing to do.