“Whole life is a hole you throw your money in,” the salesman posing as a financial advisor casually said.
Just before he showed me a Variable Universal Life illustration projecting a consistent 12 percent year-after-year return. Oh, and shortly after that, he illegally showed a spreadsheet demonstrating an 18 percent return for 40 straight years, touting I’d become a multimillionaire before age 65.
40 years, no losses, no fees, just 18 percent year in and year out. Myths, misinformation—and downright malpractice.
Multimillionaire? Off a mere $70 bucks a month?
I should have asked him to show me just one single person he knew with these types results (with this type of product).
Could it be that easy?
Nope.
Add money and wait for 40 years?
Yeah, after the salesman is long gone and no way to get in touch with him.
40 years. A lot happens and changes in 40 years.
I was 18 years old.
I knew very little about investing and even less about life insurance.
But this poser said the insurance would eventually save me tax, so it was worth the insurance expense (even though the insurance expense was over fifty percent of the premium).
I funded the policy for three months…until learning better.
My econometrics professor worked with me to create financial modeling and projections called Monte Carlo simulations, which run different market scenarios with ups and downs. After just a few hours, we realized this had a 97.8 percent chance of failing.
Really?
Disappointing.
Frustrating.
Are you kidding me?
A $210 loss at 18 might as well have been hundreds of thousands of dollars. It felt awful. It was an early tuition, about which I fantasized having it back to throw a party, buy new clothes—anything other than losing the money.
My purchase involved no intelligence, just salesmanship.
I was duped and in the dumps.
Clichés clinching at my cash.
Lies leading me down the yellow brick road to separate money from my pocket and remove my thoughts from reality.
It was a story rooted in sales and risk. Fake news (lol).
I wanted to believe the hype because it meant that wealth wasn’t a matter of effort, or value…wealth wasn’t about luck or skill…it was merely about starting early, solely about time value of money—and inflated by a bull market, of course.
Even though I was starting early, no matter how much I wanted to believe, or what the spreadsheet or illustration said, it wasn’t rooted in likelihood, principles, economics, or reality. Big numbers on a piece of paper don’t often equate to big numbers in your bank account.
(If you want to know more about the problems with the Universal Life suite of products, read this article.)
It was this experience that led me to learning about life insurance. Through my frustration and fire (lots of passion), I chose to study.
From books, to courses, to events, and even interviewing some of the brightest minds in finance, it took me 26 months to separate truth from fiction, understand the pros and the cons, and eventually chose to allocate my money to my never-fail-me strategy of the Rockefeller Method using whole life insurance.
Whole life is one form of cash value insurance, which can include other forms, including universal life (fixed interest from year to year), variable universal life (separate accounts like mutual funds) and indexed universal life (participation in some upside and some downside protection).
Unlike any of these other types of cash value insurance, whole life gives you guaranteed interest, guaranteed cost of insurance, guaranteed death benefit and guaranteed premium.
Cash value life insurance can be misunderstood due to salesmanship like I encountered. But it can also be hard to understand because it is NOT one-dimensional.
Here is what all cash value policies have in common:
- Cash value
- Tax advantaged (“first in, first out,” ability to borrow tax-free, tax-deferred growth)
- Access before age 59.5 without penalty
- Protected from creditors (fully in most states)
- Death benefit (accelerated living benefit if you can no longer perform two or more activities of daily living)
- Potential disability benefits
The downsides:
- Not all policies are created equal
- Not all companies perform well
- The capitalization period (how long before you break even on cash value, up-front costs of insurance, underwriting, marketing, reserves, surrender charges, etc.)
- Churn (switching policy types, companies)
- Qualifying for the policy (health considerations)
- Opportunity cost (what else could you do with the money)
I choose whole life because of the certainty and other benefits, including:
- Guaranteed interest rate
- Guaranteed death benefit
- Guaranteed level premium
- Ability to take a paid-up policy (for a reduced death benefit)
- Once a dividend is paid it becomes guaranteed (dividends are however not guaranteed)
Whole life isn’t perfect. It is a tool. And some of its downsides include:
- Black box (not clear on exactly how expenses impact the net (the dividend is the gross amount)
- It will not illustrate as well as a VUL or IUL (even if the illustrations for VUL and IUL are unlikely to occur)
- Stock companies split dividends between policyholders and stockholders
- Sometimes the performance of your policy is negatively impacted by borrowing (participating policies)
In addition to these pros and cons:
- What company you buy your policy with matters.
- The way you fund your policy matters.
- Which state you set up your policy in matters.
These are easy areas to address.
After interviewing insurance product designers, the top insurance salesmen, and doing my senior thesis analyzing insurance (way back in late 1990s), I choose whole life.
I now own 27 whole life policies, including multiple policies on my own life, as well as policies on my wife and kids, and business partners.
I do own one IUL on my wife.
I have max funded it and had it for almost a decade.
My plan is to roll this over eventually to a whole life through a 1031 exchange.
I only utilize whole life if it meets the following criteria:
- Participating mutual life insurance company
- At least 100 years old
- Always paid a dividend
- A rating across all agencies (A.M. Best, Moody’s, Standard and Poors, etc)
- Convertible term (key to have full amount of coverage if can’t afford all whole life)
- Hundreds of billions in assets, if not a trillion
- High early cash value and paid-up additions (ability to add more cash)
The companies that meet these criteria have cash value outperforming bonds during any 30-year period. This is my allocation for my fixed-income portfolio to eliminate the downsides of the more stable part of my portfolio.
Bonds fluctuate in value, most are taxable (if not Munis), and they don’t have the additional benefits like whole life (death benefit, guarantees, liability protection).
I don’t compare my whole life to investments. It is where I allocate my savings. It is the alternative to money markets, savings accounts, treasuries, corporate bonds, and CDs.
When I have whole life, I know the minimum interest that will be credited, and once my dividend is paid it becomes guaranteed, or that my death benefit will be around one day longer than I will. There is an Economic Value of Certainty. Knowing the money is there, it is available, and especially valuable when everything else is losing value.
In this way, it is an opportunity fund, because it is liquid, accessible, and safe. This gives my wife sanity knowing we have stability. Plus, it guarantees something that is guaranteed to happen: death. The policy is guaranteed to be around one day longer than me. This means my family trust can fund businesses, homes, and other assets rather than relying on the banks.
We can earn interest rather than pay it, protect our family assets against tax and interest rate fluctuations.
Ultimately, I don’t want to take risks with my legacy. I take risks in my business, not my trust. This is a superior way to save, to protect my money from bank failures, protect from tax hikes, and have death benefit that allows me to enjoy more of my money.
For more on this topic, grab a free copy of What Would The Rockefellers Do?. Learn to turn increase your future cash flow 20-50 percent, unlock lazy assets (those not creating cash flow), and build contingencies for volatile markets with distribution diversification.
With whole life insurance you can get more from your savings, and keep access to and control over your cash.
One thought on “When Whole Life Insurance Works—and When It Doesn’t”
Just wanted to let you know that I became a Life Insurance Agent because of you. I wanted to help people become their own banks so badly. Thank you.
However, I have found that I was duped by the industry about IULs. The way most agents sell Insurance is sleezey and not aligned with how I want to benefit, and serve others. Can you suggest some Insurance Companies that aligns with your values that would be great places to work for.