Whole life insurance? Any use it as an investment vehicle?

C

CLKeenan

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Jun 24, 2006
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My accountant/financial advisor has recommended that I look into whole life insurance to use as an investment vehicle. I'm in my mid twenties, very healthy, and single. No one depends on me for my income. If it matters, I do not own a home.

So from an 'income protection', (whole) life insurance doesn't make any sense. From an investment vehicle though, should I consider it? I already contribute the max to my Roth IRA, 10% of my paycheck to my employer 401k, and a hefty amount to an SEP IRA every year.

Financial gurus - what are your thoughts?
 


Depends on your earnings. Statistically, for the richest of the rich, all insurance produces negative value, since the insurance companies have to make a profit.

I have absolutely zero idea on US taxes, so I'm gonna ignore that side of the argument, but if you have an employer, I'm guessing your earnings aren't high enough to justify never taking out life insurance. However, do you have any family, any people that rely on your earnings? Do your parents have money stashed away if they need to go into care?

Also, have you checked whether your accountant is an IFA (or the US equivalent) - you wanna be careful taking advice from someone who takes a commission on referrals.
 
Insurance companies need to make money. They are in the game not for your benefits.

If you need to have insurance (which I think everyone should have one), just get a term insurance. Do not get whole life insurance. There's a big debate on this but ultimately you will find that those pushing whole life insurance are the insurance agents themselves.
 
I looked at it and the terms were very confusing. I was getting 4% but it seemed after all the expenses and fees, very little of those payments actually went to the value of the account.

Example... $15 monthly payment, with $11 going to expense charge, $1.50 for cost of insurance. That leaves $2.50 in cash value. So $180 in payments a year and you end up with about $30 in value. I believe the 4% is on the value... so you "made" $1.20 while paying the insurance company a fuck load of fees.

That's what the plan that was presented to me looks like, but maybe I'm misinterpreting. I don't understand the benefit at all in terms of a investment vehicle. Unless I was given a bunk deal or totally confused.
 
If you're going to go for life insurance, then you probably want to opt for term life as opposed to whole life. I'm not sure what your family situation is right now in your mid-twenties, but life insurance is really for the people that you leave behind. I'm sure there are plenty of arguments to be made about how beneficial they are as an investment, but I'm not buying into it.

I'd suggest to max out all of your pre-tax investment accounts and then begin to decide what to do with the excess. You may want to just invest in your business at this point since you're likely see a larger annual return than what most "safe" investments are paying right now.
 
I looked into it over here (UK), and my conclusion was that if you want to invest, use a dedicated investment vehicle. Whole life policies don't offer competitive returns.
 
In my past life I worked as a licensed Life & Health Insurance Agent.


You might want to look at this link on "Universal Life Insurance".

Universal Life Insurance Definition | Investopedia

Definition of 'Universal Life Insurance'

A type of flexible permanent life insurance offering the low-cost protection of term life insurance as well as a savings element (like whole life insurance) which is invested to provide a cash value buildup. The death benefit, savings element and premiums can be reviewed and altered as a policyholder's circumstances change. In addition, unlike whole life insurance, universal life insurance allows the policyholder to use the interest from his or her accumulated savings to help pay premiums.

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Investopedia explains 'Universal Life Insurance'

Universal life insurance was created to provide more flexibility than whole life insurance by allowing the policy owner to shift money between the insurance and savings components of the policy. Premiums, which are variable, are broken down by the insurance company into insurance and savings, allowing the policy owner to make adjustments based on their individual circumstances. For example, if the savings portion is earning a low return, it can be used instead of external funds to pay the premiums. Unlike whole life insurance, universal life allows the cash value of investments to grow at a variable rate that is adjusted monthly.

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It's a combination of a Term Life policy with an Annuity rider that gains value and earns interest that you can either borrow from or cash out at a later date. (If memory serves me correctly. It's been over 20 years since I was an active agent.)



Now read through this and you'll see that they are very similar. (If you live to be 100 years old the Whole life Policy will pay out it's face value to you even though you didn't die. I noticed that this bit was left out of the explanation at Investopedia. Lulz )


Traditional Whole Life Policy Definition | Investopedia


Definition of 'Traditional Whole Life Policy'

A type of life insurance contract that provides for insurance coverage of the contract holder for his/her entire life. Unlike term life insurance, which covers the contract holder until a specified age limit, a traditional whole life policy never runs out. Upon the inevitable death of the contract holder, the insurance payout is made to the contract's beneficiaries. These policies also include an investment component, which accumulates a cash value that the policyholder can withdraw or borrow against.

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Investopedia explains 'Traditional Whole Life Policy'

This type of life insurance provides the policyholder with a guaranteed amount to pass on to his/her beneficiaries, regardless of how long he/she lives, provided the contract is maintained. Most policies also offer a withdrawal clause, which allows the contract holder to cancel his/her coverage and receive a cash surrender value.

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When I was an Independent Insurance Agent, I worked out of an office with an Investment Broker who held a Series 7 license and if a client was looking for an investment I would send them his way. "I" did not like to use INSURANCE as an investment vehicle. (I seem to recall that for certain types of Annuities an Insurance agent needed to have a Series 6 License to sell them.)

Back then even a generic Money Market Account yielded a better return, and the Whole LIfe & Universal Life policies seemed be a lower return than even a CD (Certificate of Deposit) at any local bank around town.


If you truly have NO NEED to financially offset the loss of income or talent due to your death for a family member or business partner then I would steer clear of the insurance for an investment.

Insurance agents get a recurring commission on the premiums paid on a Whole life or Universal life policy for as long as the policy remains in force and premiums are being paid.
 
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