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Scenarios where whole life makes better sense?

28,564 3,726 May 3, 2018 at 10:38 AM
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After my mother's passing recently DW and I are looking more seriously at life insurance (I already have quite a bit through work but would like to decouple it).

Whole life looks like insurance with a REALLY piss-poor savings component vs. term. Basically, if you look at the difference in monthly premiums between whole and term, and put that in even a mediocre-performing investment vehicle, the returns on the term/investment combo appear to blow the whole life policy out of the water. The only benefit I can see to whole life is that you can simply keep paying it forever - vs. term where you'd have to re-up after the term, where it's likely that insurance will be far more expensive (generally you'll have more health problems by that time).

Looking at some rough numbers, the performance of the two aren't even close and I can't fathom a reason (other than above) why someone would buy whole life. Is there something I am missing?

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#2
Edit -- removed my post about estate planning benefits.
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Last edited by dukeblue219 May 4, 2018 at 08:45 AM.
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#3
Horrible suggestion

Anything in an irrevocable trust is outside the estate.
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#4
Quote from Dr. J
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Looking at some rough numbers, the performance of the two aren't even close and I can't fathom a reason (other than above) why someone would buy whole life. Is there something I am missing?
You are absolutely correct. Never ever ever does it ever make sense.

Would you buy an auto insurance policy that had a "built in savings" that you could draw on after 20 years?

Keep in mind that if you have long term financial plan in place, you should be self insured at some point in life. Meaning that if you purchase a 20 year term at 40 years old, there should be no need to purchase insurance at 60 years old because your home should be paid, kids colleges should be paid, your spouse should be able to live off retirement investments should something happen to you.

You only need insurance during the stage of life when your family depends on your income.
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Quote from dhodson
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Horrible suggestion

Anything in an irrevocable trust is outside the estate.
Thanks. I thought I was being clear that I was talking far outside my knowledge, but in retrospect I should have just stayed quiet. The intent of my statement was to poo-poo whole life insurance by saying "this is a common reason people have tried to sell me whole life" but it was phrased poorly. I've heard that advice given many times, but I only maintain term coverage to basically keep my wife housed and my kids through college if I drop dead.

Can you elaborate, then, why people perpetuate the idea that whole life is good for estate planning? Google would seem to be filled with sites (trying to sell whole life) that push it as a way to hand down cash to your heirs without tax. If I understand correctly, I can put plain cash or investments into a trust anyway up to the gift limit every year without worrying about estate tax (not that I'm in that position anyway), so what's the alleged benefit of whole life as part of that?
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#6
The people perpetuating it are insurance associated almost all the time.

If you google WL for almost anything you get recommendations for it from the same groups.

Very few people will have a federal estate issue under current laws. WL doesn't even avoid it. It's the irrevocable trust that you put the WL into that takes it out of the estate.

Even people who are going to be above the limits could likely avoid it by giving money while they are alive. This way you actually be thanked for doing it and monitor how it's spent if desired.
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I just got 30 years life insurance. I got it because we have 6 months old baby. I'm 38 years old. I'll be 68 when the insurance ends. I'm not planning to renewed it. My houses will be paid off and baby would finish collage. I got 750k insurance for $60 a month.
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#8
Just keep in mind typically there is a "discount" for paying yearly with life insurance instead of monthly.
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Quote from riconek
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I just got 30 years life insurance. I got it because we have 6 months old baby. I'm 38 years old. I'll be 68 when the insurance ends. I'm not planning to renewed it. My houses will be paid off and baby would finish collage. I got 750k insurance for $60 a month.
Can you tell me what's in my future.Peace
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for those that hate spelling mistakes www.walmarts.comCool

bulb save money by checking your insurance every 2 years (and not every 20) Thanks Liberty Mutual for reminding me to shop. The $842 increase this year sums it up. Across the board increase for Ohio....whatever
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#10
No but that person has a very reasonable plan
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Quote from riconek
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I just got 30 years life insurance. I got it because we have 6 months old baby. I'm 38 years old. I'll be 68 when the insurance ends. I'm not planning to renewed it. My houses will be paid off and baby would finish collage. I got 750k insurance for $60 a month.
To chime in on a similar note, my wife and I each got 20 year term life insurance for $1mil at roughly $34 a month. I am 32 and she is 36. We expect to have everything (currently owned) paid off by 20 years in so felt it was a better option for us compared to a 30 year term. No plans on renewing. Much better option compared to whole-life, just invest the money yourself, why use a middle-man?
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#12
Looking back now I'm kind of glad my ex-wife never got to ponder over the thought that my untimely death could send a boatload of cash in her direction.
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I like what she said, not what it means.
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#13
I know the consensus is that whole life makes no sense for many. I am in my late 50's and well diversified with Equities, an IRA, 401k, ROTH IRA, and in addition to a Term Life policy I also have a Whole Life policy which I consider a forced savings account to be part of my retirement. With a 10 year payment plan that has earned an average of 6-7% per year, my intention is to draw the tax free portion as part of my retirement; and, just in case I do die tomorrow, my family will have the face value and any additional cash value remaining (depending on how much I draw prior to death).
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Actually you are wrong on so many accounts. First off your WL has NOT likely returned 6-7% per year. Even a 10 pay policy is not returning that. It will take several years just to break even. Most people who quote such things don't understand that the dividend is NOT an actual return %. Unfortunately the insurance industry is allowed to use terms that can confuse many folks. You cant actually determine the return from the dividend return rate alone. You need to view an inforce illustration and calculate it.

A vanilla WL policy purchased today will have a guararanteed return on the death benefit under 2% return (meaning you lost purchasing power to inflation) and an illustrated a little over 5% (assuming you pick a timing of death that is appropriate for your health rating). No matter if you overfund it, use limited pay, use high early cash value or whatever you are only slightly changing that needle although overfunding is helpful for having a higher cash value. Cash values would be substantially less than DB returns. This is again based on current dividends.

Its been shown that these are horrible for forced savings. Over 80% of people lapse or surrender. Almost 1/3 in the first few years and those people lose almost everything. Even worse is those who need a forced saving pay monthly and are charged double digit interest rates instead of paying yearly. Even worse than that is they have even a higher lapse rate then those who pay yearly. So no that isnt a good forced savings plan for folks.

You would have been much better off putting your bonds in your tax adv accounts and buying equities in your taxable. Higher return. No need to take loans which can be very costly and typically much more than what you would have paid in taxes. Ability to tax loss harvest. ALSO step up in basis so TAX FREE AT DEATH is the same. Those decades of much higher returns compound over your entire life. Now that doesnt mean you should surrender it since all that is done and you have to go forward but recommending it as a forced savings is pretty bad advice.

You also dont seem to understand that any cash value you access is subtracted from the death benefit and you dont get both the cash value and the death benefit. If you were only going to surrender PUAs to get cash than that isnt likely a good idea. Since you already have one, if i were you (and im not in the insurance industry) then what i would do is make sure you are paying yearly, overfund with PUAs as much as they will let you and then IF you need money in retirement then take it out as late as possible with loans so the loan interest doesnt have time to greatly reduce the amount paid at your death.

Good luck.
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Last edited by dhodson May 14, 2018 at 07:10 PM.
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#15
Quote from tiedyed1
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I know the consensus is that whole life makes no sense for many. I am in my late 50's and well diversified with Equities, an IRA, 401k, ROTH IRA, and in addition to a Term Life policy I also have a Whole Life policy which I consider a forced savings account to be part of my retirement. With a 10 year payment plan that has earned an average of 6-7% per year, my intention is to draw the tax free portion as part of my retirement; and, just in case I do die tomorrow, my family will have the face value and any additional cash value remaining (depending on how much I draw prior to death).
Are you sure you're getting that rate? When I look at tables for a few options, the return is HORRIBLE like <1-2% horrible.

One thing I've noticed is that some people think of life insurance as a payday (like hitting the lottery) while others think of it more as.... insurance, e.g. to make up for an income gap (transfer of risk). If you want the payday, whole life is probably the only way to go since term would be super expensive (although I've not researched that, it does seem logical) once you get to retirement age. "locking in" a payday comes at a price with whole life. For term, since ideally at some point you'll not need to replace your income should you die, it's less expensive.
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