Inappropriate Whole Life Policy of the Week

[The White Coat Investor]

This could be a regular column. This one via email with enough details obscured to maintain privacy:

My spouse and I are both physicians, W2 employees in academics.  We are at a loss (quite literally) at what to do with a whole life policy we purchased right out of residency.  I have read many of your blogs and read your book, and both of these have really changed the way we handle our finances.  Unfortunately, we got the policy before I started following the WCI.

We purchased the policy in 12/2011 and the annual premium is $10,800. The plan for this policy was to use it as an alternative source of money for retirement.  It currently has a cash value of $32,000, so we are approximately $22,000 under what we have paid in.  I just had my insurance provider send me updated tables for the policy, and it looks like we won't break even until year 11 (in another 6 years).

We already max out our pretax retirement options, including two 457s and a state bonus account. We do not do the backdoor Roth, but it is something I am considering.  We contribute to a taxable account via Vanguard, and I would likely increase these contributions if we got rid of the whole life policy.  We have a fair bit of loans left but the rates are 2-3% and will be paid off in 5 years if we do not change the payments.  Only have one 15 year mortgage.  No credit card or car debts.  I really dislike the policy but have already committed five years of payments.  I am having a hard time deciding if taking a 22K loss is worth regaining 10,800 each year for other investments.

So, for those following along at home, the return on this is a cumulative -47%, or -8.8% per year. Sold to brand new attendings who not only aren't maxing out Backdoor Roths, but still have student loans. That's basically financial malpractice. 11 years to break even, and that's not even guaranteed. They've lost $10K in real money, plus opportunity cost of at least $5K but possibly as much as $20-30K.

INSURANCE AGENTS- Stop selling this crap to doctors!

DOCTORS- Stop buying this crap! If you already have, read this post: https://www.whitecoatinvestor.com/how-to-dump-your-whole-life-policy/

[PhysicianOnFIRE]

Meanwhile, the S&P 500 is up just over 100% over that time period (with dividends reinvested). Shameful.

[The White Coat Investor]

Rex wrote:

You will never stop them from trying to sell this so I wouldn’t even bother asking agents to do differently. You can only try to educate to prevent people from falling into the trap. Even with education, it’s an uphill battle.

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I can still yell at them.

[Craigy]

Rex wrote:

You will never stop them from trying to sell this so I wouldn’t even bother asking agents to do differently. You can only try to educate to prevent people from falling into the trap. Even with education, it’s an uphill battle.

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Sucker born every day.  And one that graduates from medschool every day  

 

[The White Coat Investor]

Maybe this should be a daily column instead of a weekly one. Check this one out from the comments section of a post I wrote years ago.

 

I was suckered into buying “the greatest investment tool in existence” (actual quote from my agent) almost 3 years ago. For background, I am 26 years old, married, no kids, and my annual income is $75K. I have no loans except for a mortgage and my wife is heavily burdened with student loans (she is currently financially dependent on me and would not be able to afford the mortgage + utilities). My NWM agent was referred to me by a “friend” – and might I add that every time we met, he would go through my list of Linkedin connections (mostly personal friends of mine) and ask me if any of them might be interested in “financial advice” and if I could give him their phone number to contact them. Every time I felt violated and thought to myself “what a quick way to ruin a friendship”. That alone should have turned me off from what he was selling, but he proceeded to pitch whole life as an offer I seemingly couldn’t resist, and I fell for it.

Hey NM Agents! Stop doing this! Even though your company says you should and compensates you for it. People with student loans don't need whole life insurance.

[RadDoc6876]

The White Coat Investor wrote:

I can still yell at them.

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There's 1) "buyer beware" and suckers born every minute etc., and then there's 2) outright fraud, which is a crime and should be prosecuted.  Though not technically illegal, these stories seem more the latter than the former.  To me it's not enough to shrug it off as a "buyer beware" thing--that story is about a deception and an intentional one.  Anyone remember the Truth in Lending Act that had to be made law way back in 1968 to get lenders to stop abusive practices?  Jim would you consider getting into public advocacy on this - some type of open electronic letter to Congress that WCI readers could sign recommending greater oversight of these products?  I'll sign it.  There's more and more national attention being paid to retirement planning and Americans not being prepared, so I think they'd listen. Maybe try these people:

https://www.govtrack.us/congress/committees/SSCM/20

 

[The White Coat Investor]

I'm not sure there's anything fraudulent here. If people would have read the paperwork they would have known what to expect.

But as far as advice goes, it would be the equivalent of malpractice in medicine, law, accounting etc.

[jhwkr542]

Unfortunately, I was trying to convince one of my partners the other day that whole life was a bad product. The sad thing was I had never bothered to learn all the details past the big picture "WL=bad". Now I'm having to learn about it to convince people why it's so bad

[nachos31]

Jhwkr, I'm in the same boat. Since I know they're terrible I don't bother learning the minutiae other than "don't mix insurance and investing." I find, people tend to get very defensive about the idea of having been screwed over (very reasonably so) or not making a smart choice and often become very difficult to talk to. I usually try to explore a little bit to see what they know but often end up having to extract myself with something along the lines of, "you do you."

[Craigy]

If someone's already bought it, they probably did so because they thought it was a good move.  Don't kill them about it.  That's like someone buying a new sportscar they're so proud of and you tell them how ugly it is.  That's not very nice.  Sure they can sell the car but they'll take a hit and feel bad about the whole situation.  Nobody likes being told they made a bad choice or made to feel stupid.

Now once someone starts trying to expound upon the wonders of whole life, and how you should buy it too, they then open the door to say "no, it's not for me" and then if further pushed, go into detail about why whole life is a big scam.

Also, generally speaking, the loss is taken when the policy is first sold and in the first couple years of premiums.  After that, generally the cash value keeps up with the payments in.  So you're not really saving them from harming themselves financially at this point, they already did that when they got the policy.  You might stop the slow drip of blood but the mack truck already hit them.

Finally, for what it's worth, for someone who is really a spendthrift, a whole life policy might actually be a decent way to force that person to "save" money.  Sure you or I could drop that policy payment in a savings account each month, but if most people see money in an account, they spend it (or their wife or husband or kids or mother or brother in law spend it for them).

[StuRedman]

My NWM sales man was not happy I knew about WCI.  He had some not nice things to say lol.  I got a own occ disability from him and have since ignored all the can you meet to talk about investment opportunities.  I think my own occ is crappy but that is another thread.

[The White Coat Investor]

And here is this week's installment:

my husband and I read your book a few years ago and have been following your blog ever since. Thank you for all the great advice! It is so terrible how many doctors are clueless about finances…my husband and I went to expensive med school (total debt for the two of us is $415K after interest accumulating…6 years out of med school) and in residency were living frugally, wanted to save for retirement, had a baby and wanted to start a 529 at some point but also needed a debt management plan. We didn’t want to “screw up” so we went to a “financial adviser specializing in physicians!” AKA NWM slimeball. He of course convinced us that our plans to start a Roth were a terrible idea, we should buy whole life insurance for everything, stop contributing to our student loans and put all that money towards whole life (fortunately we didn’t go that far). Kept the policies about 2 years and even let him sell us MORE whole life insurance before we got smart about it. Your book and blog were very influential in getting us out of the trap. We lost $7-8K, which as second year residents felt DEVASTATING. It was everything we had saved. But we dusted ourselves off, read like CRAZY, became WAYYYY more savvy about finances and way more skeptical of anyone in the financial industry. Fast forward a few years, and what felt like an expensive lesson at the time was probably the best thing that ever happened to us. It forced us to wake up, take control of our own finances, and not get pushed around.

At least this one had a happy ending.

[The White Coat Investor]

I got two today. Here's the second:

I need advice on my 65-LIFE Northwestern Mutual policy. I have had it for 2 years. About $53,000 total value, with about $1,160 available for a ‘loan’ at an 8% interest rate. I have a term policy as well and a life insurance policy through my work. I think I should get rid of this, though my NW mutual advisor is (not the first one that sold it to me, but a new one, so I do not think she is getting commission?) telling me to hold it because it should be used as a mid-late investment, where I withdraw money later on in life (I am 27).

I do not know enough to even begin thinking about converting it to something else. I thought I would withdraw the $1160 and then close it, but now it is telling me that is is a loan that I have to pay back so I am not sure what to do.

[The White Coat Investor]

They just keep coming. This one a 20 year old VUL, still with a loss.

This is the AXA Equitable Variable life Insurance.

The face amount: 100,000

Net cash surrender value: 21,500

Policy account value: 21,500

With a gross rate return of 6.00% (4.34% net)

Total premium payment: 28,000 (we have been paying for almost 20 years)

The policy will be terminated on the 43th year. So there will be no more insurance coverage on the 44th year and beyond.

You can't make this stuff up. It might say "gross rate of return of 6%" but it's pretty easy to see that if you've paid $28,000 over 20 years and only have $21,500 to show for it, you don't have a "gross rate of return of 6%."

[RadDoc6876]

The White Coat Investor wrote:

They just keep coming.

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The White Coat Investor wrote:

It might say “gross rate of return of 6%” but it’s pretty easy to see that if you’ve paid $28,000 over 20 years and only have $21,500 to show for it, you don’t have a “gross rate of return of 6%

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Really seems to me there needs to be legislation akin to the Truth In Lending Act to make these schemes more understandable and transparent to consumers.  (Actually, I'm thinking of the Nutrition Facts label on the side of my cereal box...gives me full disclosure of what's in my Cheerios.)  I mean, doctors are educated people by definition, and they're falling for it.  However it does seem the current climate in D.C. is heading in the other direction (less regulation).  I guess WCI's efforts and similar blogs and outreach to med students and residents can at least help spread the word.