“Whenever I hear a financial consultant (or anyone) talk about less expensive premiums for term, I know they really don’t understand how this animal of properly designed whole life insurance really works.”
Is whole life insurance a good investment?”
Few financial questions have ever sparked more controversy than this one. One post on a blog about investing for doctors (which asserted whole life should be avoided) produced more controversy, comments, and “hate mail” than all of his other posts combined – a current total of 764 comments, which the author/moderator warns readers “may take you over 4 hours to read.”
The short answer to “Is Whole Life Insurance a Good Answer” may shock you if you’ve been reading our blog for long, because, NO, we don’t consider it to be a good “investment”!
(WHAT!??? Are you checking the URL to see what website you’re on?)
We say that because Whole Life is classified as INSURANCE, not an “investment.” And as an insurance product with a powerful savings component, Whole Life is an EXCELLENT place to STORE CASH! Not unlike a house or bank certificates of deposit, a Whole Life policy is an ASSET that can be used as collateral or even sold.
That may sound like semantics to you, but it’s a distinction that helps us understand how to think about and USE whole life insurance in a much more helpful way.
Semantics aside, IS whole life a good investment… er… place to put money? Perhaps the best place to start in answering that question is to ASK some questions…
“Compared to WHAT!?”
…Compared to the stock your brother-in-law says is “a sure thing!”?
(We trust you know better than that.)
…Compared to your 401(k) with over-bloated fees invested in a Target-date fund that crashed in the last market downturn?
Whole life may be a better choice for many reasons – taxation, control, safety and stability, death benefit and the ability to leverage your dollars. We invite you to read our posts on target-date funds and thoroughly read Busting the Retirement Lies, especially the part about understanding the reality of retirement plans if you think a target-date fund in a 401(k) is the solution to all your financial worries.
What about Whole Life compared to a bond fund or annuity producing a conservative rate of return (but no death benefits)?
In many cases, the whole life policy will make more sense. However, if you have need for immediate cash flow, a whole life policy would be the wrong fit. If that is the case, contact us to discuss cash flow options that can outperform bonds and annuities.
…Whole Life compared to a fractional life settlement that is highly likely to produce double-digit returns (but ties up your money for a few years)?
(Or both, in some situations. The way to really accelerate wealth-building is to leverage your whole life policy to create MORE income-producing assets, such as cash-flowing real estate or excellent investments such as life settlements. The interest from the investment pays off the policy loan, and now you have two assets.)
The next question we must ask when considering if Whole Life Insurance is a Good “Investment:”
“By what measure?”
This is an important question, because when comparing whole life vs. other Investments, we need to know what the measuring stick is. And that may depend on you, your age and health, your life circumstances, whether or not you have heirs, your income, your financial priorities, and your desire for life insurance.
And this is where typical comparisons of whole life to mutual funds or whole life to other investments suffers from what I’ll call “The ROI Illusion.”
The ROI Illusion is a mistaken set of beliefs that-
- Nothing matters except for rate of return. Investors should always pick the investment they believe will get the highest returns, and everything will work out.
- Since nothing matters except for rate of return, then fees, taxes, liquidity, control and other considerations aren’t understood to be important.
- Past average results of wildly fluctuating markets DO predict future performance!
There are many problems with this thinking – you know, the thinking that says, “Nothing out-performs the stock market over time” – even though real investor results are dismal. Citing the extensive research of Dalbar, Inc., a company that analyzes investor behavior and returns, MoneyOver55.com reported, “The average equity fund investor earned a market return of only 5.02%” for the 20 years ending 12/31/2013. A whopping 5%, and ulcers, too!
Even if past returns were impressive, we think it’s ridiculous to assume what’s going to happen with taxes or a rather unstable market over the next 25 years anyways. What’s not ridiculous is trying to predict how a whole life policy might perform, as it’s a much more stable asset class. But here’s where the ROI Illusion leads to a double-speak and double standards.
The pro-stock/anti-whole-life crowd will use the average returns of the market (before taxes and fees), but then they’ll compare to the minimum guarantees of whole life (even though real dividends are consistently higher than guarantees. This skews the comparison horribly. Average historic returns of whole life dividends are above 6%, but in this low-rate environment, those utilizing Paid-Up Additions will see internal rates of return of about 4-4.5% (with no taxation and no ulcers.)
The ROI Illusion makes an assumption that accumulation is the goal of all investing, and ignores powerful wealth principles such as leverage, velocity, stability, protection, tax advantages, and control. The ROI Illusion leads investors astray from looking at the WHOLE picture of an investment and making wise choices. It keeps them “chasing returns” rather than building wealth.
You simply can’t compare stock and bond investments with whole life on the basis of ROI alone for several reasons:
Taxation and Privacy. The IRS neither knows about nor taxes gains in your life insurance account. Not all life insurance transactions are safe from Uncle Sam, but the growth is tax-deferred (tax-exempt as long as it remains in the policy), and policy loans are tax-free.
Death and legacy benefits. Remember, whole life has a permanent insurance component! The death benefit is a real asset that increases the value of the estate, yet typical comparisons between whole life and equity investments tend to ignore the death benefit. The 4-4.5% internal rates of return do not include the death benefit, which increases the financial benefit for heirs dramatically.
Death benefits can also be sold, delivering additional cash to policyowners. And death benefits as well as cash value can be passed to children or grandchildren gift and income tax FREE!
Ability to Leverage. As discussed in our recent post on “The Power of Leverage,” an asset that you can collateralize can give you a much higher return than what you can measure in direct ROI alone by allowing you to increase your asset base.
There are many advantages to being able to freely borrow against the cash value, as it makes a perfect emergency fund, financing fund, sleep-at-night-when-stocks-are-sliding fund, and opportunity fund. It also protects you from having to qualify for financing at an inopportune time, use high-interest credit cards, or use assets that will trigger unwanted taxes and fees.
Safety and Stability. Just think about how many people you’ve known and heard of who have lost money in the market. Now think about how many people you’ve known and heard about who “lost” their life insurance benefits. It just doesn’t happen! Even AIG’s problems had nothing to do with the life insurance and everything to do with Wall St. (and we stay far away from “stock” insurance companies, only recommending those that are mutually owned by policyholders.)
Mutual life insurance companies have paid dividends for over 100 years – even throughout the Great Depression and every recession and market “correction”! How can you measure the value of not worrying if you will lose assets in a market crash, economic downturn, or a Wall St. scandal?
Allows smarter consumption of assets. Whole life allows you to free up other money (such as some of that term insurance, which will only become more costly). It can even function as a “permission slip,” allowing the policyholder to consume more of the value of other assets for themselves (from taxable retirement accounts to home equity) and still leave assets – more assets than without whole life – for heirs.
Opportunity costs. Comparisons and debates also tends to fail to consider an investors potential need for life insurance, or the benefit of the term premiums that would be reduced or eliminated, and the opportunity cost that can be recaptured if some of the money going towards term insurance can be recaptured.
Additionally, whole life can help reduce the need for disability insurance and even long-term care insurance in many situations, through acceleration clauses for policyholders with terminal illness or in need of long-term care (find out what benefits are available in your state) and by providing a larger asset base. With whole life, your premiums become liquid and build long-term assets rather than becoming a “lost” insurance expense.
Is Whole Life Insurance a Good Investment for YOU?
We find that clients have the desire for three types of financial products:
- Products that provide an efficient place to STORE cash.
- Products or investments that GROW your cash or asset base.
- Products, investments, or even businesses that create CASH FLOW.
If you are looking for a good place to STORE cash safely while it grows, whole life is worth your serious consideration. Contact us for a whole life insurance quote today! There’s no obligation and you have nothing to lose by getting the facts.
Are You Ready to Wake Up from the ROI Illusion?
For more on the REAL returns of “typical” investments, we highly recommend reading our own Kim Butler’s revised and updated book, Busting the Retirement Lies, available now on Amazon in paperback
LISTEN: Guide to Financial Peace Radio: Is Life Insurance a Good Investment? Todd Strobel and Kim Butler have a lively discussion about why life insurance is often a BETTER place for your money than a bank – though NOT an “investment” per se!