Whole Life - Perspective

[texas_fortune]

New forum member here. Spent yesterday reading volumes here about the dangers of a WL policy, but I'd like some feedback based on my own unique position.

My position--41 years old, gross about $325k a year and max out my traditional IRA, 401k, and deferred compensation programs (200% match). No debt besides a new mortgage taken out about 2 years ago. Regular contributions also made to traditional brokerage account holding mutuals, stocks, etc. No children but live in high tax state with high real estate values and most planning goes into ensuring that my wife is cared for should anything happen to me.

I purchased a $500k WL policy ($600/mo, $8k premium a year), along with a good amount of term and disability in late 2015 from a close, long-term friend and associate at NWM. I trust him implicitly--just to get that out on the table. Roughly $17k in premiums paid, cash value is around $10k.

Based on my situation, is there still no value in this kind of option? Fully understand that the break-even timing for the cash value and premiums paid to align can be significant, but the primary selling point for this "investment" was the fact that I could get regular (albeit lower) returns over time, in addition to the dividends (albeit now declining), that could grow on a tax-free basis. Agreed that better returns could potentially be realized on the open market, but would require me to increase my existing investment exposure already in place.

I am uncomfortable with the fact that utilizing money that is paid into this policy requires me to borrow against it at a pretty sturdy interest rate. The idea that the "cash" is there for something like a down payment on new property is false, as the idea of paying back the loan in conjunction to a new mortgage would be prohibitive.

I don't feel taken by the situation, and I've asked tons of questions along the way. And the actual outlay is not that significant, but I am definitely not interested in continuing to plow money into something that does not make sense for me.

Interested in feedback specific to my financial situation--thanks in advance.

[Donnie]

Generally you should use things for their intended purpose.  Intended purpose of whole life insurance?  Permanent death benefit.  Do you need a permanent death benefit?  Pretty clearly not based on your description, so why are you paying for one?

If you want a guaranteed return, invest in CDs or treasuries.  At least there, you can get your money back if you need it and there is no penalty if you stop buying more.  There may be some breakage costs if you liquidate early, but they will never be 50% plus of your "investment" like with whole life.  You can also borrow against these securities tax free, just like with whole life.

[jfoxcpacfp]

There is such a wealth of information on this site about the costs-benefits of whole life insurance. I suggest you start with Top 10 Questions about Whole Life Insurance and continue reading the links at the bottom of the posts.

texas_fortune wrote:

Based on my situation, is there still no value in this kind of option?

Click to expand...

Yes, actually there is. But for your friend, not you.

[VagabondMD]

jfoxcpacfp wrote:

There is such a wealth of information on this site about the costs-benefits of whole life insurance. I suggest you start with Top 10 Questions about Whole Life Insurance and continue reading the links at the bottom of the posts.

texas_fortune wrote:

Based on my situation, is there still no value in this kind of option? 

Click to expand…

Yes, actually there is. But for your friend, not you.

Click to expand...

I once had a friend at NWM. He is now dead to me.

[jfoxcpacfp]

Vagabond MD wrote:

jfoxcpacfp wrote:

There is such a wealth of information on this site about the costs-benefits of whole life insurance. I suggest you start with Top 10 Questions about Whole Life Insurance and continue reading the links at the bottom of the posts.

texas_fortune wrote:

Based on my situation, is there still no value in this kind of option? 

Click to expand…

Yes, actually there is. But for your friend, not you.

Click to expand…

I once had a friend at NWM. He is now dead to me.

Click to expand...

Yes, Godfather.

[FIREshrink]

This friend, whom you trust implicitly, sold you a policy costing you $17,000 over two years which now has a cash value of $10,000. Meanwhile, he earned a commission of approximately one year's premium, or $8000. To make the point, let's assume he made a commission of $7000.

Year 1: You $17,000, him: $0

Year 2: You $5000, him: $7000

Year 3: You $10,000, him: $7000

Neat trick, that. With friends like those...

[VagabondMD]

FIREshrink wrote:

This friend, whom you trust implicitly, sold you a policy costing you $17,000 over two years which now has a cash value of $10,000. Meanwhile, he earned a commission of approximately one year’s premium, or $8000. To make the point, let’s assume he made a commission of $7000.

Year 1: You $17,000, him: $0

Year 2: You $5000, him: $7000

Year 2: You $10,000, him: $7000

Neat trick, that. With friends like those…

Click to expand...

If he were a lesser friend, he would have sold the OP a $1M policy ($1200/month). An enemy would get the works, a $5M policy ($6000/month)

[texas_fortune]

I understand the point about the commission. I don't work for free and don't expect him to either. The question is about the long-term viability of this product as a financial instrument.

Understand that it may not produce the highest returns, but is the consensus here (as it seems to be) that this product is 1) basically a scam 2) is only sold by scam artists 3) has no value of any kind to anyone in any kind of financial position, and 4) should probably be illegal?

Trying to get honest and objective opinions of the product and its place in a portfolio, not the salesperson.

Thanks again.

[q-school]

I think there are select situations where whole life can be strategically used. I am in the distinct minority though.

[FIREshrink]

texas_fortune wrote:

I understand the point about the commission. I don’t work for free and don’t expect him to either. The question is about the long-term viability of this product as a financial instrument.

Understand that it may not produce the highest returns, but is the consensus here (as it seems to be) that this product is 1) basically a scam 2) is only sold by scam artists 3) has no value of any kind to anyone in any kind of financial position, and 4) should probably be illegal?

Trying to get honest and objective opinions of the product and its place in a portfolio, not the salesperson.

Thanks again.

Click to expand...

If you need permanent insurance, then there is a place for this product. Do you need permanent (lifelong) insurance? If not, this is not a good product for you.

[Hank]

You need high quality, low cost life insurance until you save enough money that you no longer need insurance. $2-3M of term insurance for 20-30 years should be sufficient for a high earner who saves a good percent of gross income.

Insurance is good for insurance; it isn't good as an investment. There is no magical class of stocks or bonds that the insurance company has access to that you cannot buy as an individual investor. The only free lunch with insurance is that approximately 80% of whole life policy holders surrender their policy prior to death. (Why do 4 out of 5 whole life customers surrender their policy if its such a great investment?)

If this friend truly is a good friend, they'll continue to golf, fish, or hang out with you whether or not you keep your whole life policy. Don't continue to send good money after bad based on affinity marketing.

[texas_fortune]

Appreciate the insights very much. Good luck to everyone.

[MaxPower]

You may not expect him to work for free, but I think we can all agree that a physician or dentist (not sure on your profession) who continually sells people on expensive treatments that they don't need is unethical at best and criminal at worst.

You're suffering from sunk cost bias, coupled with the fact that your friend whom you "trust implicitly" essentially ripped you off for his benefit. I'm sure that doesn't feel great.

As others have said, there is a very narrow and defined category of people for whom WLI may be a possible solution, but you fit almost none of those criteria. Good luck, to you.

[DMFA]

Didn't hear what you wanted to hear, so you're out? C'mon, man.

How are you able to deduct a traditional IRA despite having an income that high and having an employer account? Obv $5,500/yr is a drop in the bucket in all your annual investments, but it seems like you'd be better off getting a tax advantage from it like backdoor Roth instead of a non-deductible basis...and is saving on the CGs/dividends worth the higher future tax rate, in comparison to a standard taxable?

Biggest draws to cash-value life insurance are death benefit, asset protection, and avoiding estate tax. If your estate is worth over 5.5 million or so (subject to estate tax), and you have room in your portfolio for lower-earning holdings, and you have no need for short-term liquidity, and your tax strategy is already optimized, and you might have otherwise exposed assets (not specifically protected by law like state homestead, ERISA, etc) then WL/UL etc can be useful to fill that niche. However, that only occurs in a pretty low percentage, and the sale of these products to people with far better uses for their money (i.e. hundreds of thousands in debt, no insurances, minimal or no other investments like tax-advantaged retirement accounts or a taxable brokerage account, etc) is what spurs the vitriolic zealotry against WL on this board.

I do encounter a few folks for whom it *is* actually an acceptable decision. You don't seem like one of them, but I'm not your CFP. It's *most likely* not the best utilization of your money, but with the rest of your situation seeming very well-positioned, you could probably either just see it the policy through, or cash it out and cut the loss, take your pick. If your biggest concern is taking care of your wife if you die, I don't see why robust term policies and well-structured investments in your holding of choice (equities, bonds, real estate, whatever you like) wouldn't be superior to an insurance-investment hybrid that doesn't fit the bill as well as either component would on its own.

I think the larger issue is your implicit trust in someone who fills a role which is specifically to sell their product to people who generally do not need it and profit from it.

[Gamma Knives]

I have often wondered how many of these sales people have talked themselves into believing their own pitch. I think that the reason that people sell these polices to friends or come on this forum defending whole life is that they actually believe what they are selling. They have been trained that these are good products and that they are helping people. There are examples in medicine where a specialty continues to promote an intervention despite data showing it is ineffective; we believe in what we do and I suspect a decent number of these sale people believe in what they do. People rarely view themselves as the bad guys. Naturally, this does not absolve them of responsibility nor am I suggesting that it does.

 

"It is difficult to get a man to understand something when his salary depends upon his not understanding it. - Upton Sinclair