Thoughts on Whole Life Insurance as an alternative to banking?

[AgainstAllOdds]

my family get a million dollars if a piano falls on my head. I don't recall @MJ DeMarco mentioning this kind of product as one of his investment vehicles in Unscripted but I'd be curious to know his thoughts on it as well as everyone else's.

I don't know anything about life insurance, but I am very much interested in this piano business of yours. Maybe we can work something out.

 

[tonyf7]

I've had term life insurance for almost 20 years now. It covers my wife and kids in the event of the inevitable. But the term is almost up and I met with a new insurance agent today. He really tried pushing Universal Life Insurance on me, which really confused me. So I came home and started researching. Seems Universal Life is a shit product. But then I came across strategies for using Whole Life Insurance as a great alternative to a savings account.

Your family gets a death benefit in case you croak, you earn at least 4-5% on your money and you can "borrow" that money anytime you want, both tax free and with no penalties. You "pay back" the loan at the same rate you're earning on your cash value so it's basically a wash (since you're borrowing money from the insurance company and not directly from your cash value). Seems that at the end of the term you can cash out all your dough free on any tax. Plus that money is untouchable. No lawsuits, liens, bankruptcies or ex wives can get to it.

I really like the liquidity of it. If I want to grab some money to grow my business or for a downpayment on a house, I can, just like I would from a regular savings account. I'm just earning 5% instead of 0.5% and my family get a million dollars if a piano falls on my head. I don't recall @MJ DeMarco mentioning this kind of product as one of his investment vehicles in Unscripted but I'd be curious to know his thoughts on it as well as everyone else's.

Thank you for your time.

 

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[Kevin88660]

I've had term life insurance for almost 20 years now. It covers my wife and kids in the event of the inevitable. But the term is almost up and I met with a new insurance agent today. He really tried pushing Universal Life Insurance on me, which really confused me. So I came home and started researching. Seems Universal Life is a shit product. But then I came across strategies for using Whole Life Insurance as a great alternative to a savings account.

Your family gets a death benefit in case you croak, you earn at least 4-5% on your money and you can "borrow" that money anytime you want, both tax free and with no penalties. You "pay back" the loan at the same rate you're earning on your cash value so it's basically a wash (since you're borrowing money from the insurance company and not directly from your cash value). Seems that at the end of the term you can cash out all your dough free on any tax. Plus that money is untouchable. No lawsuits, liens, bankruptcies or ex wives can get to it.

I really like the liquidity of it. If I want to grab some money to grow my business or for a downpayment on a house, I can, just like I would from a regular savings account. I'm just earning 5% instead of 0.5% and my family get a million dollars if a piano falls on my head. I don't recall @MJ DeMarco mentioning this kind of product as one of his investment vehicles in Unscripted but I'd be curious to know his thoughts on it as well as everyone else's.

Thank you for your time.

I am a financial adviser based in Singapore. So I will discuss in the context of Singapore environment. I hope I can offer you more points to consider that you can do more research to form an informed opinion.

Universal Life Insurance generally has high distribution cost (more commission for the sales force and hence less return for you). I generally recommend customers to look at other whole life insurance products if they are into whole life insurance.

Yes you can borrow money from it. But at 5.5percent interest here in Singapore, it is not attractive for a secured loan. You get less than 2.5percent from the bank by pledging your property.

Yes it has tax advantages in U.S. but I would not elaborate further because in Singapore there is no inheritance tax or capital gain tax on investment.

Did your agent tell you a 4-5 percent return? Honestly that’s too high. It is more like the yield on death benefit rather than surrender value. In the benefit illustration “investment return” is the yield for the insurance company not for you. Look for term “yield to maturity” printed in black and white. It will say at age 70, the yield to maturity is xx %. Do a internal rate of calculation if unsure.

When picking a whole life insurance make sure you ask yourself are you looking at wealth accumulation or protection. Typically the high protection products have slower cash value accumulation. Low protection value products have cash value that gets accumulated quickly.

I recommendation has always been this. Do not look for insurance as saving or liquidity. Go for whole life insurance for coverage and legacy planning (death benefit at natural death). If you want liquidity just have cash in bank. If you want saving buy a pure saving (endowment/investment) product. It is much easier for planning. You do not have to worry about liquidating your saving plan but unnecessarily reducing your coverage.

 

[MJ DeMarco]

If I want to grab some money to grow my business or for a downpayment on a house, I can, just like I would from a regular savings account. I'm just earning 5% instead of 0.5% and my family get a million dollars if a piano falls on my head. I don't recall @MJ DeMarco mentioning this kind of product as one of his investment vehicles in Unscripted but I'd be curious to know his thoughts on it as well as everyone else's.

My life insurance is actual wealth left to heirs through a trust.

I don't use life insurance, although I think it is a good idea for a family just getting started. If you have generational wealth, then I don't think it's necessary as proper estate planning should take care of life tragedies.

 

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[MTEE1985]

This seems almost intentionally complicated.

It seems that way because it is. It’s why we seldom recommend whole life policies. It’s very difficult if not impossible to determine before signing up what % of your premium is being allocated to death benefit vs. expenses vs. cash value.

Now there are some circumstances that warrant it such as ultra high net worth individuals who are looking for a supplemental instrument for gifting to heirs, but I would call this the exception rather than the rule as these folks don’t need cash in the meantime so higher premiums nor a longer timeline don’t affect them. As the article below mentions you need to pay into these policies for roughly 15 years before they begin to be the better choice.

@JScott to your points the chart below is one of the better comparisons I’ve seen comparing different options. Obviously this is leaving out the S&P alternative but figure $5,000/year for 40 years at 10% probably gets you about $2,500,000.

Is Whole Life Insurance Right For You? - Consumer Reports

Sales agents are pushing whole life insurance but do you need it? Consumer Reports lets you know.

www.consumerreports.org

It is not fair to compare insurance products with the performance of equity index because most of them invest in a portfolio that is more focused on bonds.

don’t tell that to my golfing buddy who runs PIMCO’s investment credit bond fund which has returned 7.5% since 2000 while yielding 3.5%.

Bottom line from everything I’ve ever studied and learned is that the policies have benefits for the right people but for probably 95% of consumers, they are not the best choice.

 

[Tom H.]

Sorry for resurrecting an old thread, I want to chime in because I'm a regular guy (not a financial professional) with a whole life policy.

My policy is structured for cash value, it's intended function is to act as a savings account more than anything else. The policy costs me money for the seven years (if you ignore that I am also buying the death benefit for my young family), it starts showing a positive return in year 7 and then increases by a guaranteed 4-5%. This is ignoring that it's a mutual company that pays a non-guaranteed dividend on to of the guaranteed returns. At some point around year 10 (I think), the expected dividends should cover my premiums.

I'm not interested in maximizing my return or building wealth through investment, I'm interested in safety and minimum risk.

My choice to use a whole life policy is largely influenced by my personal politics (or something like that). I don't trust banks, I don't trust Wall Street, if I could I'd keep all of my wealth in precious metals and similar assets. Since I do need financial services, I prefer to do business with a mutual insurance company that has been around since the 1800s.

I like that there are no tax complications to figure out with my policy and there are no assets, just a contact that guarantees I can borrow money at a prime rate, anytime, no questions asked. Also repayment of the loan is totally up to me, I don't need to replay if I don't want to i.e. I can spend it on retirement or emergency, don't have to wait to die to cash out.

I'm sure there is more money investing in equities, but that's not what I want to spend my time doing, and my goal is just to have an alternative to a savings account so that I have access to funds for entrepreneurial projects.

---

I want to mention a concept I didn't see in the previous discussion: all money your spend is financed. You either borrow and pay a fee, or spend your savings and forego earning a fee. With the whole life policy, it's like savings, but you never diminish your principal like you would with a savings account.

Well, my 2 cents!

 

[FastLaneSoCal]

Your point "C" is one I try to point out to people. When you take a policy loan you don't diminish your principal.

I will look at my illustration and try to think about your question regarding cash value appreciation. I believe my illustration is based on the assumption that I max out paid up additions, with a guaranteed appreciation of 4%. Then my cash value is a combination of some percentage of my normal death benefit, plus 100% of PUA. The PUA is what makes the whole thing function as your own "bank".

I will chime in here and mention some of what I do with and for clients. This is informational only and I am not trying to change anyone's mind or sell anybody anything. I don't care if people agree or disagree with this approach, but figured I might be able to add some clarity for those fortunate enough to have built substantial wealth or on the road to doing so. I have found much value from others' posts here, so perhaps I can share some myself.

In this environment of huge deficits - damn near close to $28 Trillion and climbing...

https://www.usdebtclock.org/

we feel higher taxes (income, cap gains, estate) are inevitable since our politicians will never stop giving out handouts and will definitely not end social security, medicare, medicaid.

So, we seek out any tool available to plan and mitigate taxes whenever possible. Permanent life insurance has some of the best tax treatment of any vehicle: tax deferred growth, Income tax free death benefits to heirs, and tax-free distributions (since they are taken as loans). Notice I said permanent, not Whole Life (which is only one form of permanent life insurance).

There are two areas where we use life insurance (other than coverage for untimely death):

1) Massively over funding policies to accumulate large amounts of cash to taken out tax-free 10-15 years later (allowing for some great compounding) for a variety of purposes - retirement income, travel, long term care needs, etc...The products we use are more flexible than whole life, allow for some nice potential upside linked to various equity indexes, while not participating when those indexes are negative for a given year. The power of this compounding, uninterrupted by negative returns is very real. When taking the money out there is no tax - since it is a policy loan so not income. The KEY is that while the money we take out is charged interest, that interest is paid by other cash in the policy AND the amount we take out will still earn investment credit. So, we play the arbitrage of paying interest of 5% on tax-free withdrawals and earning something above that (close to 2% spread since I have been working with these).

We are essentially just "borrowing" the life insurance chassis to take advantage of the tax benefits and thus efficiently design policies to have as little death benefit as possible (before becoming a MEC which is taxed differently). It is akin to a Roth IRA - but my clients and most of you on this forum make too much money to put money into Roth IRAs and even so the contribution limits are really low.

2) Buying huge policies in various efficient ways to provide tax free liquidity to heirs upon death - or 2nd death if a married couple. While the estate/gift tax exemptions are currently $11.7 Million per spouse...it is highly likely these will be greatly reduce - perhaps even this year. Any assets over and above these exemptions are subject to 40% Federal estate tax which is due from the heirs 9 MONTHS LATER AND MUST BE PAID IN CASH. This is where the life insurance comes - instant liquidity to pay these taxes so illiquid assets (real estate, closely held businesses) don't need to sold to pay the bill.

Some of my clients are working with attorneys to proactively gift some of their assets to Dynasty trusts which are irrevocable and for the benefit of their kids/grandkids. Believing the $11.7 Million exemptions will be reduced, they are using the exemption for gifting during life. This is complex with many moving parts, but a sounds strategy for the right person/family - especially when gifting assets which will appreciate significantly...because those assets will now appreciate "outside of the estate"...

For those assets left in their estate we calculate what they might conservatively compound at and then make an educated guess where estate tax exemptions and rates might be and then design strategies to ensure the liquidity will be there at the time the heirs need it.

When the solution is life insurance we often take advantage of low interest rates by borrowing at very low rates to pay huge premiums for short periods of time (typically 10 years). There are some great lenders making these loans and since they are 100% collateralized at all times - through the death benefit or a combination of the cash value and and liquid accounts) and thus lend at attractive rates 12 month LIBOR + a spread. Currently around 2.65% right now.

Most of my clients are wealthy and entrepreneurial and very focused on IRR. So while they "could" make huge premium payments they prefer using leverage when it makes sense. In this case they feel good about using OPM (other people's money - in this case the banks/lenders) and having those dollars put into a vehicle which has comfortable averaged well over 6% for decades - thus arbitrage. They often know what their own IRR is meaning what they can earn by reinvesting in their business, or real estate. So, not only are they very likely going to earn a spread of a few % over their loan amounts, they don't have the opportunity costs of using large amounts of their money for insurance premiums and can earn at their own favorable IRRs. (The do usually pay some amount for interest out of pocket, but it is very small as a percentage of premiums). Ultimately, the loans will usually be paid back from cash out of the policy perhaps 15 years later or so.

In some cases, clients will write off interest on these loans by classifying them as "special purpose loans" for their company...but I let them decide that with their CPAs. I have heard arguments for and against this being legitimate so I stay away from advising in this area where I am unqualified...

For anyone still reading, I may have spurred more questions than providing answers. I would just caution anyone from expecting to use GOOGLE to find quality advice on any mainstream financial topics. The "Script" as @MJ DeMarco would say is to max out your 401k, use over the counter mutual funds or index funds, buy term if life insurance is needed or whole life to "be your own bank". None of what I do will be easily found in a Google search and there is much complexity - including quality of lenders, insurance companies, client suitability, understanding risk, conservatively projecting, etc...

I tell my successful friends/clients that they are the 1% of the 1% the wealthy (which they truly are in a global perspective) and to use "solutions" peddled to the masses easily found on the internet b/c of SEO means they are missing out on ideas and strategies available to them because of their wealth and success.

Whatever you do, keep an open mind and don't blindly accumulate and invest without factoring in in income and possibly estate taxes on your future wealth. Thanks to MJ and many others for creating and cultivating this "most excellent" forum. (spoke in my best Keanu Reeves voice from Bill and Ted's Excellent Adventure)

 

[Insurancepro]

Why would I put so much money into paying off my house? When I sell it, the bank keeps all my equity and all I get is the sale price!

 

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[Kak]

Very ignorant statement. After 30 years you could have dividends or PUAs cover the premium. You could also schedule the policy to be contractually paid up after a certain number of years. There are also mandatory nonforfeiture options. Assuming didvidends are used to buy PUAs, the dividend in year 30 should be about twice as much as the premium, and the reduced paid up nonforfeiture option should be about 25% higher than the original face amount.

You might want to cool the inflammatory remarks. @JScott is hands down one of the smartest guys on the forum.

As far as life insurance policies are concerned, there isn't much out there I like less as an investment than some blowhard telling people what they're ignorant about.

This seems almost intentionally complicated. Customers are probably ignorant by design.

 

[Tourmaline]

I've been researching building your own bank as well.

Everyone comparing using a life insurance policy as a bank and comparing it to investing seems to be missing the point.

The point is to:
A. Be able to finance anything your self, on your repayment terms, and capture some of the interest that would otherwise go to a bank. It gives a large amount of financial freedom.
B. Have a vehicle that guarantees growth of investment. Yes there are fees up front, but typically by year 7 the policy will pull ahead compared to bonds.
C. Not lose out on the opportunity cost of spending money - e.g. Buying a car in cash means the cash cannot appreciate.
D. Tax advantages, protection from creditors/being sued, with a perk of death benefit too.
E. After a long enough time you can make the policy pay for its premiums too.

One thing I've recently been wrapping my head around is that there is no guaranteed rate of appreciation of the cash value of a policy. But that it will appreciate is guaranteed. Cash value is tied to the present value of the death benefit, it's not appreciation based on any securities rather it's appreciation based on inherent value of the policy itself.

It's kinda like bonds in a sense? The present value of a bond is a reflection of what a bond will be worth when it matures. The cash value of a policy is a reflection of what the policy will pay out upon death.

I'm interested in if anyone else has actually implemented this.

I find it super interesting that the super rich take advantage of whole life insurance policies too!

 

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[Kevin88660]

If the goal is just the death benefit and legacy planning, wouldn't a term life policy be better and cheaper? You can get way more death benefit for way less than a whole life policy. Also, is it true that at the end of a whole life policy, you can't get both your death benefit AND your cash value? That means thst when you die, the hand over the death benefit but all the "savings" you put into the cash vslue portion they get to keep. (Learned that from Dave Ramsey just today, Lol). If that's the case, then f*** that sh**!!! I'll find another place to park my money!

Yes you cannot get FULL cash benefit and death value. Most policies allow you to withdraw the accumulated bonus portion without diminishing the death benefit.

Term plan works best when you know the time horizon exactly. For example you know when your child is going to graduate from university and be independent. You just don't know when you are going to die. You buy a term plan until you are age 80? What if you live till 81? At 80 do you have to force yourself to commit suicide if you are not dying?

Low cash value whole life plan works better in legacy planning because you do not have to time your death. It’s basically pay me when I die. If you do the math and compare buying a term plan until 100 years old versus a whole life plan the whole life plan is more economical.

Do not get sucked into the Guru hype and ignore the details. When they say buy term only they usually assume

1) You do not want to use insurance to do legacy planning
2) You will do better in investment versus whole life insurance cash value growth.
-I agree if you have time to manage and the skill to do it. That’s why i advocate low cash value high protection whole life plan. But people like Dave Ramsey give misleading bullshit like an expected 12 percent return their forecast for equity growth as a reason why you should spend as little money as possible on insurance.

-Study shows that even though equity growth has been stellar for the past 30 years. People who did the buy term and invest the rest did worse than whole life insurance buyers. It is because they spent the money on consumption and didn't invest properly. So it goes back to the previous point about having the discipline.

You will never hear about Dave Ramsey criticizing mutual fund fee and promote etf as an investment. Why? I leave that for you to research if you are interested.

 

[tonyf7]

Yes, I do a good bit of real estate investing. But, my thoughts on the real estate market have more to do with the broader economy than what we might see with real estate indicators. Specifically, I think the real estate market is relatively healthy if you were to look at it in a vacuum.

But, you can't really look at real estate in a vacuum. Real estate values will be impacted by other economic factors, like: wage growth, unemployment, interest rates, inflation, etc. And for a whole lot of reasons, I think the broader economy is in for a correction in the near future.

First, simply from a timing standpoint -- this is the longest economic expansion in history, and if you look at historical timelines, we are about 5 years past the peak of the distribution curve for length of economic expansions.

Second, from a purely qualitative standpoint, it "feels" like we're at the top of the market. Irrational exuberance in several industries (including housing) and a lot of profit taking from seasoned investors.

Third, the economic data doesn't look good. Sure, things like the stock marketing and unemployment are strong, but those things are almost always strong right before a recession. More importantly, if you look at things like the yield curve (now inverted for three months, which has never happened without a recession following within 12 months), out-of-whack GDP to equities ratios (see "The Buffett Indicator" for more info), stagnating wage growth, increased inflation, manufacturing output in recession territory, consumer debt at an historical high, corporate debt at an historical high, increasing real estate inventory, global economic slowdown, increasing federal deficits, and a host of other less obvious indicators (like auto sales slowing, retail sales slowing, etc), it seems obvious to me that we've hit the top of the market, and have been bumping along the top for about a year now.

I'm not so arrogant that I think I can predict *when* the downturn will start, but I'm arrogant enough that I'm willing to predict that this economic expansion has ended, and from here, we will see stagnation until the downturn starts. Personally, I've sold off much of my real estate holdings over the past year, and am sitting on a lot of cash. The investing that I am doing is very conservative and I'm mostly making investments that are more "recession resistant" than in the past.

All that said, I've been saying this for over a year now...so take it for what it's worth...

Great insights! I think we're going to sell it and pay off all our debt (including the mortgage of the home we currently live in). It has been a golden goose for us for over a decade now. We've financed two cars with it, got some cash out of it and recently rolled in some student loans into it. I think it's time got for to lay its final egg for us by making is 100% debt free. I feel so thankful to have had it.

 

[Kevin88660]

Single premium policies requires you to pay a lump sum at start and no further premium payment is required.

Regular premium policies require constant payment until the premium term is over.

It depends on the product specification.

 

[Rabby]

If you were worried about becoming a litigation target, you could stuff some money into single premium whole life.

The cash value and death benefit are sheltered from litigation and creditors. Even if they take everything else, you have paid-for life insurance with no premiums due.

It guarantees your heirs get something. Or you can borrow the cash value. Not that I'm buying one, or selling one.

Downside: It becomes a Modified Endowment Contract (MEC) in the US, which has less favorable taxation features than regular whole life.

@JScott why do you say it's "more expensive?" Do you mean you pay more up front? Anything that isn't financed over time has this feature... when you pay cash for a house, you pay $200,000 on day 1. When you finance it you pay less on day 1, but more over the amortization period.

 

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[Kevin88660]

Usually single premium policies do not have high protection. They are more geared towards cash value.

So a fair comparison would be cash value of single premium premium (low protection) versus the cash value of a regular premium policies. Single premium policies according to my experience actually accumulates return faster. I am in the business doing comparison everyday. The reason is simple. The company pays you more when you are willing to commit your money for a longer period of time (sacrificing liquidity). Think of it as having a 3 years fixed deposit saving versus having a one year fixed deposit saving and auto roll over for the next two years, the former will generate better interest.

The next point is a bit more in depth for those folks interest in the finance business. Insurance companies love selling regular premium. Sales agents have contracts indicating the minimum amount of regular premium sales they have to make every year but never on the single premium ones. The reason is highly behavior. Most clients suffer from sunk cost delusion. They tend to surrender their single premium policies after it has broken even and made money. But having your policy break even at year six and surrender it at year 7 “for a profit” is an enormous bad decision but most people have poor concept about time value of money and they will keep doing this. This leaves insurance company at disadvantaged scenario because after the client surrender his policy he has to make a new sale to continue the business volume (for a product that is ideally designed for a 15-20 years time horizon). This means new administration and distribution cost, a problem that insurance companies do not have to face for regular premium policies.

 

[tonyf7]

My life insurance is actual wealth left to heirs through a trust.

I don't use life insurance, although I think it is a good idea for a family just getting started. If you have generational wealth, then I don't think it's necessary as proper estate planning should take care of life tragedies.

So you don't see it as a vehicle for legacy planning, correct? Because that is how whole life policies seem to be marketed.

Would you say cheap term life insurance is the way to go?

 

[MJ DeMarco]

Would you say cheap term life insurance is the way to go?

IMO, yes, if i was young and with a family to provide for.

 

[tonyf7]

That said, I've played with the math, and for those who are reasonably smart investors, the returns on whole life aren't going to match what you'd get on outside investments. The big reason being the hefty fees against funds going into the policy (commissions are exorbitant).

Yes, the fees seem cray cray, but aside from that, I just can't wrap my head around why I would pay money into an account that earns 4% interest, but that I will never truly own. Because when I die, my wife will get the death benefit, but what happens to all that money in the cash value? If I buy term and have 500k in a regular savings, I at least know my wife amd kids will get the death benefit plus the 500k in our savings account. But if that 500k was in a cash value policy, where does it go? In the insurance company's pocket? If so, that doesn't make sense to me. At all. Why would anyone literally give away their money?

Am I thinking about this correctly or am I missing something?

No matter what interest you pay me on my cash value, my family will never see that money after I'm buried six feet under.

And let's say I piss away half that 500k in a savings account due to inflation and my wife only ends up with 250k worth of buying power in 20 years, that STILL beats not getting a penny of that money back from the insurance company when I die.

How can this be seen as a sound strategy?

I would really need someone to hold me by the hand and baby step my a$$ through each number in order for this to make sense to me.

 

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[Kevin88660]

Don't Whole Life policies have fees as well? Ramsey claims the first 2-3 years are all fees. Either way, I'm not sure I like the idea of paying into an account that I'll never get my money back on.

Could I buy term and rewrite the policy every 5 years to extend it an additional 5 years? Would still be cheaper than whole life premiums 20 years from now I'd assume.

And after fees from the whole life policy, wouldn't my rate of return on the cash value be lower? Probably not the 4-5 percent they advertise. Wouldn't it be about the same as putting my cash in a 2.5% online savings account?

So much information to process!!

-Yes there are cost and charged embedded inside the product. Look at total expense ratio in the benefit illustration.

-If you buy term and renew there will be new underwriting for the new application. As you grow older when illness catch on there will be a time when you are no longer accepted or the company will charge you extra loading for the same coverage due to health condition.

-If you are looking for insurance products for saving. I recommend endowment policy. They have high cash value with minimal protection value. Whether its suitable for you depends on what you want. Are you looking for liquidity? Insurance products are long term commitment and they are very bad in liquidity. If you are looking for investment safety then it is suitable. They usually have a guaranteed surrender value upon maturity which is higher than the amount invested.

 

[Kevin88660]

I'm not going to spend a lot of time writing out my thoughts, as there are a lot of people who think whole life insurance is the greatest thing since the wheel. And they'll argue in favor of whole life insurance (and the "infinite banking" idea) until they're blue in the face.

That said, I've played with the math, and for those who are reasonably smart investors, the returns on whole life aren't going to match what you'd get on outside investments. The big reason being the hefty fees against funds going into the policy (commissions are exorbitant).

I'll just leave it at that and let any whole life proponents tell me that I just don't have enough information...



End of what term?

Depends on the expertise and skill of the investor.

If someone has time and skill to do his own investment and trading just open an IB brokerage account.

If someone is knowledge about investment and prefer low-cost buy and hold strategy just buy vanguard product.

There is a larger segment of population who prefer safe and unsophisticated way of investment. They will go for capital guaranteed life insurance products such as endowment plans. Lots of them had bad experience getting burnt by penny stocks and they quickly swing their future investment to the safe side.

 

[Kevin88660]

On the term versus whole life argument, my view is it doesn't really matter as long as you keep your protection and saving into separate products.

Protection- You can buy term until 65 years old for instance (retirement age). You can also choose a whole life that pay you when you die. This is for customer who want to leave a bit of money for the children using insurance. Choose the whole life plan that have negligible cash value so that they have high protection (death benefit).

Investment- Invest in whatever you want. You can invest in a pure saving/investment products through an insurance company or do it yourself (buy mutual fund and etf through a broker).

The problem arises when some people want to address protection and investment using one product such as whole life insurance. They seek protection from the product and meanwhile uses it as a saving tool for the future. So when they need the money they have to terminate the plan. When they terminate the plan the protection is gone. It creates difficulty in planning.

I do not believe that certain products types by design are inherently superior. If you buy a term plan until 65 versus a whole life plan (minimal cash value) of course the term plan is cheaper because the whole life plan Guarantees a payout and basically it is like you buying a term plan into age infinity.

When it comes to financial products the devils are in the details. Products with high distribution cost and expense ratio are universally bad regardless of how they are being branded. It just means that too much of your money will being used to pay for administration, managers fee and sales force commission.

 

[tonyf7]

When it comes to financial products the devils are in the details. Products with high distribution cost and expense ratio are universally bad regardless of how they are being branded. It just means that too much of your money will being used to pay for administration, managers fee and sales force commission.

This is exactly what I'm figuring out about whole life insurance as I do more research. This article does a great job of explaining it in terms I can understand.

Whole Life Insurance - The Essential Guide

Whole life insurance outsells Term 2:1. This critical review looks behind the whole life sales hype to reveal complications and issues you must understand..

financialmentor.com

 

[Kevin88660]

This is exactly what I'm figuring out about whole life insurance as I do more research. This article does a great job of explaining it in terms I can understand.

Whole Life Insurance - The Essential Guide

Whole life insurance outsells Term 2:1. This critical review looks behind the whole life sales hype to reveal complications and issues you must understand..

financialmentor.com

Don't get too influenced by online opinion. Listen to all but make your own judgement.

Financial products are essentially contracts. This is no such thing as “good category of products” and “bad category of products”.

Whole life insurance as saving was popular before the 80s because equity market was bad. Stock market was dead water. It was only after the bull market rally for the past 30-40 years that we began to hear “buy term and invest the rest”. But keep in the mind that it was based on a projection of high economic growth, low inflation since the 80s-the golden era of globalization.

 

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[steelandchrome]

I have priced both ways and had salesmen tell me why Term is a waste of money and why Term is awesome and Whole Life is a rip off. Honestly I think both suck as most people pay into them for years and then either stop paying and let them lapse wasting all the money or redo into a new policy and again wasted all that time and money. I also know a lot of people get suckered into policies with massive loopholes that they aren't aware of and families get screwed in the end.

Real life example of a bad policy and people getting screwed. My wife lost her grandfather who on his deathbed told us where his policy information was and that noone in the family would ever have to worry about money again. When we went through thousands of stacks of papers (please for the love of god put your policy somewhere that it can be found!!!) I finally found his $1M life insurance policy. I didn't even want to share it with them at that point as it was a $1M policy, but only if he was killed in a public transportation accident! He got $5k if he was killed in a normal auto accident, and $3k for natural death. He had paid $20 a month for 25 years for this policy thinking it was a $1M policy and in the end got $3k. They were very deceptive in marketing it because at the top it was big and boldly written that it was a $1,000,000 policy with a tiny little*. He paid $6k to recoup $3k....

That said I have a wife, daughter, and another daughter due in 5 weeks so I have $1M in term life just as a security blanket for them as I do not have that "generational wealth" yet.

 

[Kevin88660]

If you know how to do your investment and have the time to do so, then sure Scott you should be doing it on your own to save cost.

 

[tonyf7]

As long as we're picking arbitrary timelines, let's pick one that doesn't just cover a period of pure economic expansion...

How about your past 13 year average?

@JScott If I'm remembering correctly, I think I read that you deal in real estate quite a lot?

What do you think about the housing market? Think we're due for a correction?

I own a property in Washington D.C. that is just now getting back to the value it was at before the 2008 crash and I'm thinking of selling before another crash. Would hate to wait another decade to recover from a downturn. The neighborhood it's in is about to start booming with tons of development so there's definitely room for more growth. But I'm just not so confident that this market will be able to stay so generous for another year or two.

 

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[Rabby]

Did you calculate the calories you burn writing 480 checks instead of one? Kidding.

Fair enough if you have a theory to base it on.

 

[Insurancepro]

Again, if you pay for 30 years and then stop paying, you lose that $500K death benefit, despite your 30 year payment history. You will retain the cash value of the policy.

Very ignorant statement. After 30 years you could have dividends or PUAs cover the premium. You could also schedule the policy to be contractually paid up after a certain number of years. There are also mandatory nonforfeiture options. Assuming didvidends are used to buy PUAs, the dividend in year 30 should be about twice as much as the premium, and the reduced paid up nonforfeiture option should be about 25% higher than the original face amount.

 

[Kevin88660]

It is not fair to compare insurance products with the performance of equity index because most of them invest in a portfolio that is more focused on bonds.

If you believe that most of your money should be in equity that make you 10 percent a year, it is largely a risk preference.

What I am saying is, if you do an apple to apple comparison, and find a product provider with competitive fee structure, it can save time and provide less risk for a lot of people who are not interested in doing their own investment in the wild wild west.

I just do not agree with the Dave Ramsey BS that insurance is ripping everyone off and everyone will get 12 percent putting their money in U.S. equity. Dave, how about I give you the money and you guarantee me 6 percent return with your property as collateral and you get to keep the rest of the profit. Don’t expect Dave having the balls to do that!

 

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[Kevin88660]

If you were referring to my post before yours, I specifically said the S&P Composite index. Not bonds.



As long as your investing horizon is long enough, historically (for nearly 100 years) there is been very little risk in the S&P Composite. Now, you could argue that the future is not indicative of the past, but I could make that same argument against insurance companies -- they may all default and go out of business.

But, if you want to assume that history is a good indicator of future performance, the S&P Composite should return about 10% over any sufficient period of time.



Why do you characterize putting money in a 100 year old equity index to be "the wild wild west?"

I've heard people fear-mongering real estate, crypto, and other asset classes...but the S&P Composite? Come on.



I can't speak for Dave Ramsey, but I don't know too many people who invest in real estate who wouldn't offer you a 6% return with their property as collateral. Most secured real estate lending is at higher rates than that, and I know plenty of very successful investors who would be happy to borrow millions long-term at 6% with property as collateral.

In fact, I'll borrow as much as you have at 6%, secured by real estate...I'll turn around, arbitrage it out at 10-12%, and everyone will be happy!

S and P composite is basically pure equity.

What I am saying is, your disagreement with insurance products is largely in you believing in putting your money in pure equity and wait for then to appreciate. Absolutely nothing wrong with that.

My defense of the industry is as follow. Insurance products invest in a mix of bonds and equity, more heavily in bonds. If you compare insurance products versus someone investing in a similar basket of bonds and equity. Insurance products do not really charge you a high fee and diluting your return much, in comparison with the time you saved and the capital guarantee it provides.

The funny thing is, I don’t really disagree on your view in investing that much. I actually advised young clients to put money in equity etfs but they insist to buy insurance products. I shut up then do the deal. But just bear in mind that not everyone is the same.

I think your view is better repositioned that as “ I do not like insurance products because they invest in instruments that are too safe, whereby I can invest in riskier products and have a long investment time horizon and eventually get a superior return.” Well then I do not see any issue with that.

Back to the question on property financing, Singapore banks offer floating rate of about 2.5% per annum. Fixed rate would be higher but the the banks generally do not give fixed rate more than three years. If you can offer 6 percent on secured lending here it will be the money chasing you not the other way. Could you elaborate more the real estate lending in your area?