In the following article, we will first address a common whole life insurance myth or downright lie and then follow up with whole life insurance pros and cons relating to that myth.
According to a study by PLOS One, the average patient visit to the ER will cost $2,168. The cost of the average visit to an Urgent Care facility is around $100. For those that just skim the surface of the data, you might think the ER provides very little value.
Now obviously the truth of the matter is that the two different services fit uniquely in the marketplace.
You probably wouldn’t get much value by going to an Urgent Care for a gunshot wound because they don’t have the facility to provide that care.
Likewise, you would be better off going to Urgent Care for a sprained ankle or a cut on your hand, because the cost would be much less.
Why am I talking about the cost of an ER visit?
Because many people that criticize whole life, and perpetuate the myths, are doing so by separating out the various aspects of the product and comparing them to other products while in a vacuum. ER care for a urinary tract infection is 6x more expensive than the same treatment in an Urgent Care facility.
So why should you go? You’re paying for the expertise and equipment that comes from having a hospital at your disposal.
Who knows, you might need much more serious care once you arrive, and you’ll be thankful for the additional resources when you need them.
The same can be true of whole life. It has many parts, and each has a variety of benefits.
In this article I’d like to discuss some whole life insurance pros and cons, address some myths (and outright lies) and perhaps provide some insight.
Jump on the internet and you’re sure to find a variety of “financial gurus” stating that whole life is the single worst thing to happen to the financial community. Yet, whole life continues to be one of the most sought after financial products for the extremely wealthy.
In other words, those that have the resources and the experience to get the best information, and access the best options, choose whole life insurance. But before we go there, let’s look at some of the common myths in whole life insurance.
Whole Life Insurance Myths
How to read this article: We will first address a common whole life insurance myth or downright lie and then follow up with whole life insurance pros and cons relating to that myth.
Myth # 1 – Whole Life Is Horrible For Pre-Retirement Income Protection
The argument states that Term Life is the best value. You can get a $1 million face value on a healthy 30 year old for less than $700 a year. The equivalent whole life policy would cost 10 times as much or more.
Guess what? That is true.
But it’s also true that whole life is not ONLY pre-retirement income protection.
I’m sure you’ve all heard the term by Aristotle “The whole is greater than the sum of the parts.” I don’t think that quote comes from a whole life discussion, but it should have, because it’s true of whole life insurance.
You can’t remove all other aspects of whole life and then say it’s a poor value in comparison to something else that has one purpose only.
Life vests are much cheaper than life boats, but don’t tell the Titanic survivors that the life vests are a better value.
Whole Life Insurance Pros and Cons #1
So the con here is obviously the higher price of whole life insurance vs term life insurance. It is a given that a product that insures your life and will last your entire life will carry a higher price tag than term life that expires worthless 98% of the time.
The pro of whole life is that the higher price tag can be mitigated by getting this type of life insurance policy at a young age, adding specific riders that maximize the cash value up to, but not crossing the line, of becoming a modified endowment contract MEC, and allowing you to utilize that cash value in as little as 30 days.
Myth # 2 – Whole Life Is The Worst Way To Get A Permanent Death Benefit
The argument here is that there are other types of insurance that provide the permanent death benefit at a much lower cost, such as guaranteed no-lapse universal life. This type of policy is cheaper, provides the death benefit, but doesn’t have any cash value.
In order to make this argument really stand on it’s own, there has to be some discussion of the cash value growth that is available to the whole life policy holder. Because otherwise, we have an apples to oranges comparison (like the term life comparison in Myth #1).
In order to discuss the potential growth of the cash value, a detractor will typically cherry-pick some guaranteed whole life illustration and then bring up inflation or agent commissions to further make their point “obvious.”
The reality is that there are multiple ways to benefit from a cash value life insurance policy down the road, and inflation is just one of the factors involved.
For example, it’s true that a cherry-picked guaranteed illustration may suffer from inflation, but it doesn’t suffer from taxes or lawsuits. It may have higher commissions (not always the case, and can be minimized in a policy designed for self banking), but it also offers more to the policyholder. Again, the life vest is cheaper, but it’s not always the best solution to the problem.
Whole Life Insurance Pros and Cons #2
The con here is that there are cheaper permanent life insurance policies, therefore obviously whole life insurance is a scam.
The whole life pro would be that the benefits of whole life insurance as a wealth storehouse, particularly when used in conjunction with the infinite banking concept®, can lead to financial freedom in a short time.
Myth # 3 Whole Life Provides A Horrible Investment Return
Here again we have detractors pulling one aspect of whole life out of the entire package and comparing it to others that do much less. The myth that is perpetuated is that whole life only returns 3-4%, while “traditional” investments will earn 7-12%.
Now let’s just assume these numbers are correct for a minute, so we can make a point. Keep in mind that the 3-4% return is guaranteed against loss, has tax benefits, loan provisions, estate benefits, and income protection. Whereas the 7-12% is subject to taxes, market loss (long term averages are not helpful when you want to retire during down years), and also to investor whim.
Now about those numbers…
If these numbers were actually true, you might be willing to accept those risks. The reality is much different from those numbers, and here is how I know.
The Dalbar Inc. report in 2015 provided the following chart for investor returns. I’ve highlighted some areas to point something out. The numbers you likely hear quoted by the “gurus” are in the red box. But, the red arrows point to the “actual returns” of the various investors.
Take a look and decide if whole life is a horrible investment return. And all the while you should keep in mind that this is just ONE part of the entire product. And, by the way, historically the polices designed for infinite banking we recommend have done closer to 6%+ on average over the last 10 years, with guaranteed returns around 3-4% annually. With no down years. Think about that.
Whole Life Insurance Pros and Cons #3
The con here would be that whole life is a terrible investment. The line of reasoning asks why anyone would ever invest in whole life insurance when you can buy term and invest the difference, earning average returns of 12% a year.
The whole life insurance pro is twofold.
First, whole life insurance has a guaranteed return averaging 3-4% or more. Add in dividends, and the returns climb to 6, 7, 8% or higher, tax free based on IRC 7202.
Second, a properly designed dividend paying whole life insurance policy from a mutual insurance company not only earns dividends income tax free, but the cash value can be borrowed against and used to buy other assets outside of life insurance.
And here is the craziest part. The cash in your account is still earning guaranteed interest and dividends, while at the same time, earning a return in the cash flow asset you used the loan to purchase.
Myth # 4 Whole Life Is A Horrible Way To Save On Taxes
To be honest, I’ve only seen this myth perpetuated recently, and I was somewhat surprised. It was stated that a 401k plan or Roth IRA actually provides “MORE” tax savings than whole life.
Typically these whole life detractors like to state that they don’t believe that taxes will be higher in the future, or that they will be in a higher tax bracket. They firmly believe they will have a better tax situation in the future, so any tax-deferral is an advantage in their minds.
Personally, I think this is rose-colored glasses looking at a dismal future, but each will have to make this decision for themselves because we don’t have a crystal ball.
What we do have is historical tax averages. And of course the data provided by the National Taxpayers Union. The chart below is a little dated, but you get the point. For those in the top tax bracket, they are near the lows, not the highs.
So make the decision yourself. Will taxes be more likely to increase or decrease in the future? If you think they’ll increase, then tax-deferral is not the route you’ll want to take.
Having said that, let’s also look at the fact that a whole life policy allows you to WITHDRAW from your cash value tax-free (you already paid taxes on some of it) AND interest-free.
It is true that policy loans on your cash value are charged interest even though they are tax free. But it is also true that you are earning interest on that policy loan that usually is equal to the interest charged, so in most cases it is the equivalent of being interest free AND tax free.
If it isn’t interest free, it’s usually less than 1%. Would you rather pay 1% on a loan, or 25%? And of course don’t forget that you don’t have the early IRA and 401k withdrawal and loan restrictions, or the required minimum distributions that are associated with the typical tax-deferred products.
The federal tax code is 74,000 pages long, so it’s clear that there are going to be a large variety of ways to game the system with your investments.
Whole life may not be the absolute best way to take advantage of the tax system, but for those that like to keep things simple, I think it’s clear that cash value life insurance provides a tremendous tax benefit, while also providing much more.Especially for those that take advantage of the banking aspects of whole life.
Whole Life Insurance Pros and Cons #4
The con would be that other investments offer better tax savings than whole life.
The whole life insurance pro would be that there are significant incentives in the tax code associated with cash value life insurance. Among these incentives would be tax free dividends, tax free policy loans, tax deferred cash value growth, and a tax free death benefit. Just try and get those benefits, particularly a death benefit far greater than your account balance, in a 401k or IRA.