Inappropriate Whole Life Policy of the Week

[The White Coat Investor]

Here's one from the Bogleheads forum:

My question is should I cut my losses and get rid of the policy or keep it. I bought the policy 6 years ago. The premium is currently just under 12K with 1m of coverage. My goal when I bought it was to pass on assets to our kids tax free, and have some cash value that could be used as well. But now it just seems better to have term and invest the rest.....We are planning on having kids in the next 2-3 years. I make about 60K and my wife is in school....Her student loans currently 50K going to about 65K by next year when she graduates.

Yup- 20% of your gross income going to whole life insurance while carrying student loans. Seriously, what kind of a jerk does that to anyone. As bad as these things look when sold to doctors, they look even worse when sold to middle class folks. Truly the "payday loan of the middle class."

[Drsan1]

I really want to know what the people on this site that feel these policies are "good" and being sold "appropriately" have to say about all these stories of people buying these policies with student loan debt, not maxing out retirement accounts ( especially matched pre-tax accounts). I would love to hear a NWM person say..."that policy was sold inappropriately"!

[childay]

Drsan1 wrote:

I really want to know what the people on this site that feel these policies are “good” and being sold “appropriately” have to say about all these stories of people buying these policies with student loan debt, not maxing out retirement accounts ( especially matched pre-tax accounts). I would love to hear a NWM person say…”that policy was sold inappropriately”!

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Probably going to be hard to find but would make an interesting guest post..

[The White Coat Investor]

Guess what? Another person without dependents sold a NML Whole Life 65 policy and a Term 80 policy. I don't know how these guys sleep at night.

All of this is new and alot of info for me. Im 30 and about to finish PA school. not quite in the doc range but still with the same issues. As of right now i signed up with a 65life with 100k cash value for $129 and a term 80 900k death ben policy for $35 with NWM.both are monthly premiums of course. im single and have no dependants.im only a few months with the policy, 4 months in and wondering if I should cancel these policies and just invest in something else. I havent really suffered much loss but would it be worth keeping one or the other? I do have my 403b, roth and traditional iras in places as well. cash value only $7.87 =)

[adventure]

The White Coat Investor wrote:

cash value only $7.87

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Not a total loss!

[CarrieMD]

Hi Friends,

Do I have any recourse for being sold an inappropriate VUL? I read something above about a "suitability charge". I can't afford to max out my Tax-Advantage retirement and pay the VUL. Oh, my husband and I have $540,000 balance on our student loans. SO INAPPROPRIATE. The more I learn about VUL the angrier I get. PLUS, when confronted about this, my advisor told me I have a cash-flow problem. HA! How about you have an ethics problem for selling a VUL to a family with so much debt? Crooks. As a side note this advisor used to be heavily endorsed by this website.

I'm waiting for term to come through but if I could file a complaint or argue back any premiums so this advisor might save public humiliation I'd like to do that.

Thanks.

[VagabondMD]

CarrieMD wrote:

Hi Friends,

Do I have any recourse for being sold an inappropriate VUL? I read something above about a “suitability charge”. I can’t afford to max out my Tax-Advantage retirement and pay the VUL. Oh, my husband and I have $540,000 balance on our student loans. SO INAPPROPRIATE. The more I learn about VUL the angrier I get. PLUS, when confronted about this, my advisor told me I have a cash-flow problem. HA! How about you have an ethics problem for selling a VUL to a family with so much debt? Crooks. As a side note this advisor used to be heavily endorsed by this website.

I’m waiting for term to come through but if I could file a complaint or argue back any premiums so this advisor might save public humiliation I’d like to do that.

Thanks.

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Your recourse is to send a certified letter to the broker and terminate the plan ASAP. Technically, it is "suitable" for you to have a VUL policy for investment and insurance, though it is near the bottom of the list of solutions for both. FWIW, coming out of training, my father-in-law sold me such a policy. He was a Kool-Aid drinker, knew how to pitch the sale, and I did not know better.

I do not recall any such products or advisors being endorsed by WCI, but I do not follow this too closely.

[The White Coat Investor]

CarrieMD wrote:

Hi Friends,

Do I have any recourse for being sold an inappropriate VUL? I read something above about a “suitability charge”. I can’t afford to max out my Tax-Advantage retirement and pay the VUL. Oh, my husband and I have $540,000 balance on our student loans. SO INAPPROPRIATE. The more I learn about VUL the angrier I get. PLUS, when confronted about this, my advisor told me I have a cash-flow problem. HA! How about you have an ethics problem for selling a VUL to a family with so much debt? Crooks. As a side note this advisor used to be heavily endorsed by this website.

I’m waiting for term to come through but if I could file a complaint or argue back any premiums so this advisor might save public humiliation I’d like to do that.

Thanks.

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I think you should email me with details. I think I can help. I know I can help with anybody I have "heavily endorsed" but I don't know of any firm I have ever "heavily" endorsed that sells VULs. In fact, I've only ever had one advertiser that sells VULs, and I think it would be fair to say I have never "heavily" endorsed them. In fact, every client I have ever referred to them received a note from me about VULs. At any rate, if you were really sold a VUL while owing $540K and not being able to max out retirement accounts, I'd like to know the details. editor (at) whitecoatinvestor.com

[CarrieMD]

The White Coat Investor wrote:

CarrieMD wrote:

Hi Friends,

Do I have any recourse for being sold an inappropriate VUL? I read something above about a “suitability charge”. I can’t afford to max out my Tax-Advantage retirement and pay the VUL. Oh, my husband and I have $540,000 balance on our student loans. SO INAPPROPRIATE. The more I learn about VUL the angrier I get. PLUS, when confronted about this, my advisor told me I have a cash-flow problem. HA! How about you have an ethics problem for selling a VUL to a family with so much debt? Crooks. As a side note this advisor used to be heavily endorsed by this website.

I’m waiting for term to come through but if I could file a complaint or argue back any premiums so this advisor might save public humiliation I’d like to do that.

Thanks.

Click to expand…

I think you should email me with details. I think I can help. I know I can help with anybody I have “heavily endorsed” but I don’t know of any firm I have ever “heavily” endorsed that sells VULs. In fact, I’ve only ever had one advertiser that sells VULs, and I think it would be fair to say I have never “heavily” endorsed them. In fact, every client I have ever referred to them received a note from me about VULs. At any rate, if you were really sold a VUL while owing $540K and not being able to max out retirement accounts, I’d like to know the details. editor (at) whitecoatinvestor.com

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I'll shoot you an email, probably should've just done that to begin with. But reading all these posts got my heart rate up and opened old wounds. I guess you're right about the "heavily" statement. I'm not sure how frequently they were endorsed on this site back in the day (2013). Thanks for your help!

 

[The White Coat Investor]

Here's this week's addition:

My wife and I are currently 3 years into a whole life insurance policy. We've each been paying a 2k/month premium.

Our current cash value if we were to terminate or lapse our policy would be about 51% of the total premiums would paid up to this point....My wife also has a pretty substantial annuity that she's unhappy with the returns on.

This is what happens when you get financial advice from an insurance salesman--they recommend you buy insurance products whether you need them or not. And what happened? Half their money is gone, not counting opportunity costs.

[ajm184]

My suggestion to stop the madness with whole life et al (I know I live on Fantasy Island) is to make the purchaser actively 'prove' the need to these types of insurance products.  Now other than checking a box saying 'I need permanent insurance' and the agent (i.e. self dealing) on a back end form is the 'proof'.  Proof would each be a CFA level 1 exam equivalent on the intricacies of that specific whole life policy (no help from the agent allowed, no notes, multi hour exam), pass you can buy the policy, fail; too bad.  The process of understanding an actual whole life policy should make it abundantly clear how terrible a product it is for 99%+ of people.

Also, I know about a different product that can act similarly in terms of insurance component if there is an actual permanent need for life insurance without the craziness of investment component.  Write me directly if you would like some more information and then I can decide if it is useful as a separate public topic.  I used to lend money against this particular product which is why I know about, and no I am not an insurance agent in disguise!

[MaxPower]

Dollars to donuts the firm CarrieMD is talking about is Larsen Financial.

Back in the day when it came to light that they were heavily pushing VULs (they pushed one to me but my advisor had no idea about refinancing student loans, so I fired his a**) they were supposed to come back on here and show how beneficial this product was. Instead, crickets.

How close am I CarrieMD?

[ajm184]

Rex wrote:

ajm184 wrote:

My suggestion to stop the madness with whole life et al (I know I live on Fantasy Island) is to make the purchaser actively ‘prove’ the need to these types of insurance products.  Now other than checking a box saying ‘I need permanent insurance’ and the agent (i.e. self dealing) on a back end form is the ‘proof’.  Proof would each be a CFA level 1 exam equivalent on the intricacies of that specific whole life policy (no help from the agent allowed, no notes, multi hour exam), pass you can buy the policy, fail; too bad.  The process of understanding an actual whole life policy should make it abundantly clear how terrible a product it is for 99%+ of people.

Also, I know about a different product that can act similarly in terms of insurance component if there is an actual permanent need for life insurance without the craziness of investment component.  Write me directly if you would like some more information and then I can decide if it is useful as a separate public topic.  I used to lend money against this particular product which is why I know about, and no I am not an insurance agent in disguise!

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All forms of permanent insurance have already been discussed here in case you havent noticed.  Hopefully you are talking about any UL product since the insurance industry has shown in the last few years that they can just jack up the cost of insurance to the maximum allowed if they arent making enough money on the investment component or the other guarantees later on appear “too good” and you are stuck with no options.  With IULs they have even more levers than standard ULs because they can change the cap and participation rates.  For VULs they can change the cost or availability of underlying investments within the product.  There is also nothing special about getting a loan against something you own.  With insurance they only allow a portion of the cash surrender value so the insurance company takes on zero risk with it.

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Ok, I will give this a shot, but a couple of caveat's; a. the person getting the insurance must have a permanent need, b. I will probably mess up the explanation, so ask questions, c. I am in no way endorsing, nor do I use this product as I don't have a permanent need for insurance, d. I poked through all of this thread and looked at the headers of the others posts in this forum and didn't see this discussed.  If it has, I missed it and apologize in advance.

a. It is one year guaranteed renewal term insurance up to age 100.  There is no individual investments, borrowing against the policy.

b. Underwriting is standard though a bit more involved relative to a say a level term policy; Age, smoking, other health risks, blood, urine etc.  When you pass, the death benefit passes to your estate, no borrowing from the policy.

c. It is a pain to underwrite, so if you have a permanent need death benefit of less than $1 million, this isn't for you.  In addition, you must have the financial wherewithal to pay and premium shortfall.

d. Based on the underwriting/actuarial risk the premium is determined.  From there, the policy works a bit backwards.

e. Financial leverage is then used to determine the amount borrowed to pay the policy premium (due quarterly if that matters) based on insurance returns.  For example, a $1 Million term policy may require say $5 million in order to generate via investments the return to pay the policy premium over time.  If the insurance company does not generate sufficient investment returns, the policyholder has to pay to make up any shortfall.  The policyholder must also pay and on an ongoing basis have two quarters of excess premium for the policy.

f. Ideally, the insurance investment returns are designed to a. pay the current year policy premium and slowly build additional funds (these funds can be borrowed/withdrawn by policyholder in excess of the two quarter policy premium limit) to be used as the policy premium costs rises over time.

g. You, the policyholder via the insurance company borrows the $5 million from a bank for your policy and invests it.  Bank takes credit risk of the insurance company.  You die, the $5 million amount is repaid to the bank and insurance company pays policyholder the $1 million policy amount.

h. Taxes- Policy holder has borrowed $5 million from bank, policyholder owes bank interest based on credit risk of insurance company (L plus a usually low amount, 50 bps in my time).  Policyholder has taxable investment revenue generation, partially offset by the interest paid.  You owe taxes on the investment amount generated.

I. Excess amount(s) in policy-  The two quarters of premium is refunded to you, any excess goes to the company underwriting the policy on your behalf.

[The White Coat Investor]

MaxPower wrote:

Dollars to donuts the firm CarrieMD is talking about is Larsen Financial.

Back in the day when it came to light that they were heavily pushing VULs (they pushed one to me but my advisor had no idea about refinancing student loans, so I fired his a**) they were supposed to come back on here and show how beneficial this product was. Instead, crickets.

How close am I CarrieMD?

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Here's the crickets: https://www.whitecoatinvestor.com/variable-universal-life-insurance-as-a-retirement-account/

[Donnie]

ajm184 wrote:

My suggestion to stop the madness with whole life et al (I know I live on Fantasy Island) is to make the purchaser actively ‘prove’ the need to these types of insurance products.  Now other than checking a box saying ‘I need permanent insurance’ and the agent (i.e. self dealing) on a back end form is the ‘proof’.  Proof would each be a CFA level 1 exam equivalent on the intricacies of that specific whole life policy (no help from the agent allowed, no notes, multi hour exam), pass you can buy the policy, fail; too bad.  The process of understanding an actual whole life policy should make it abundantly clear how terrible a product it is for 99%+ of people.

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I am always a bit amazed that people sign up for paying $20k per year premiums without understanding what they are buying.  You point out the main problem with whole life policies, they are complex and the sales commissions and rates of returns are hard to figure out. The solution isn't regulation requiring demonstration of such understanding through, it's education, that sites like this try to do.  Make sure everything is properly disclosed, and let the consumer decide for himself.

I do find the hysteria about sales agents and insurance companies making money on these products a bit too much as well.  Yes, whole life insurance is a bad option for almost anyone.  No, residents with several $100k of debt shouldn't be buying whole life insurance.  That said, this is America.  People are allowed to sell things for a profit.  I mean if Herbalife can exist, whole life insurance can too.