First to understand this post you’ll have to go read Term vs Whole Life Insurance – What Do The Numbers Show? from @freefrombroke. To make sure I give proper credit, the post was actually written by Evan (@mjtm) from My Journey To Millions. Definitely a great read and an interesting post. Then the comments start flying. I just can’t help but respond to the comment by “citishark”. Keep in mind that I am cutting and pasting citishark’s comments word for word (I am not responsible for typos or misunderstandings in the questions posed).
1) what is the interest rate earned you used to calculate the Whole Life Policy?
A participating whole life insurance policy does not have an interest rate, it participates in the earnings of the company and thus pays a dividend. The dividend interest rate in 2010, for the policy illustrated, is 7%. Interest rates are used in Universal Life insurance policies.
2) amazing what you can “create” when you compare plain policies avoiding to talk about the “whizzles and bells” in the Whole life insurance contract to make an “honest and plain ” comparison with PLAIN term insurance. No better way to deceive financially-uninformed people, uh?
I’m not really sure what the question is here. I do think he means whistles when he says “whizzles”. I do agree with him here when he makes the “plain” comment. Except that I don’t know what he means by “plain term insurance”. What other kind is there? There is return of premium term insurance and permanent term insurance but I haven’t seen either of those types beat a properly designed whole life insurance policy.
That being said my agreement to the plain comment is with the whole life insurance policy that is used. It is a plain whole life insurance policy and I don’t believe it is properly designed. If you’re looking to beat buy term and invest the difference, using the same information from the original post, my set up would look more like this…
| Year | Cash Value | Death Benefit |
| 1 | $3,431 | $495,764 |
| 5 | $23,393 | $547,637 |
| 10 | $57,054 | $610,716 |
| 15 | $99,382 | $673,937 |
| 20 | $155,783 | $738,978 |
3) Why cash value does NOT start growing from day 1? (err…if I am paying the same premium and YOU say it goes simultaneously to pay x insurance and the rest to “my” investment account)
The reason cash value doesn’t start growing in day is because a lot of initial expenses come out including, what no one wants to talk about, commissions. I’m here to tell you the secret of whole life insurance…it doesn’t have to be this way. I showed that above with my numbers which does have cash value from the start.
4) among the “perks of ownership” in Hole Life policy are that “you can take money out, right? if you ever want to take it out to use it since its yours, its considered a loan against the policy. Why do loans come with – interest – at 6-8%? See..you earn 1-4% and when you want to use whats yours, they charge u 6-8% to use it…again this is a great policy. Flock to it!
Interesting question. The biggest thing this makes me think of is direct vs non-direct recognition. With direct recognition any money that is taken as a loan is taken out of the cash value. With non-direct recognition, when a loan is taken the money stays in the cash value and continues to participate in dividends. Essentially what they are doing is collateralizing the loan with a portion of the cash value.
Using direct recognition most policies will charge an interest rate and then credit a portion of that interest rate back to the policy. Non-direct recognition works differently. The interest rate is variable at current market rates (varying from company to company) while the money stays in the cash value and continues to participate in the dividends.
On another note, you don’t have to take out a loan. You can also surrender a portion of the policy. In this case you would take a reduction of death benefit and receive monies directly from the cash value that never have to be paid back. As long as the amount you receive is less than the amount you paid in there is no taxable consequences.
It is important to note that if you do take out a loan it may or may not have to be paid back. If it is not paid back it will be deducted from the death benefit payout. Planning is required to do this properly and this is just one of the many areas that most insurance people will let you down.
5) most people do not read the life insurance contract. Whole life contracts (ALL of them!!)If you would ever need to use this cash value, the insurance companies have a right to hold that money and not release it to you for up to 6 months. Say the market is booming and they are making great returns, they will hold your money as long as they can to yeild THEM the best profits. Sweet! (but …for whom?)
I’ve read life insurance contracts cover to cover. I can’t think of anything specific that I remember in regards to this. You could very well be right. I would guess that some companies would have this language in their contracts and iw oudl guess that some won’t. What I can say is that I have experience in helping people get access to their cash values immediately. A top quality life insurance company can wire monies from the cash value of the policy to you, in some cases, in the same day. Truth be told, life insurance companies don’t want to do this but in emergencies I’ve seen and had to lobby for this to happen. Hopefully you never need it this quickly.
Life insurance companies have reserve requirements that mean there is liquid monies available and in my experience I’ve never seen or heard of a life insurance company saying no to someone trying to access their cash value. This might speak to the important of only dealing with financially strong, top-rated life insurance companies.
In contrast, this question reminds me of 401ks. I’ve definitely heard more and have more experience with them holding on to monies for longer periods of time. But that’s a whole other story.
6) Why isn’t it deceiving the consumer to call the return of overcharged premiums “dividends” as if they were new money earned and created by a real investment of the policyholder money? FTC and IRS refer to them in clear terms, as what they really are: “…mere return of premiums the insurance companies overcharge to the unsuspecting policyholder”…
Dividends actually come from a companies divisible surplus. The divisible surplus is monies available after a company meets contractual obligations, operating expenses, contingencies and other general business expenses. The divisible surplus in a whole life insurance policy from a mutual insurance company comes primarily from 3 areas: 1. death claims (or mortality) savings, 2. investment results and 3. expense savings.
It is also important to note that with a true mutual insurance companies all areas of the company can have a surplus that contributes to the dividends. This means that not just the life insurance branch contributes to the dividends but also other areas of the company including but not limited to an investment company that is owned by the mutual insurance company. Whereas a non-mutual whole life insurance policy will only receive divisible surplus from the life insurance section of the insurance company.
7) How all this compare con Level and Plain TERM now?
Okay, I don’t really know what he means by this…is this English? What I will say is truthfully, this whole comparison so far has left out the biggest cost and expense of term insurance, opportunity cost.
I’m not the writer of the post nor am I the one who posted it. My guess is neither of them is willing to say that one type of insurance works in all scenarios. What they are instead trying to do is have people keep an open mind and educate themselves more on the current state of life insurance. Things are changing. The most prominent changes in recent years are the cost of insurance for all types of life insurance and the increased flexibility of whole life insurance.
I’m with Evan and Craig when I say that I’m not willing to admit that term insurance is the answer for everyone and all situations. In fact, I see a lot of places where a whole life policy will perform far better than term insurance. That being said, for the average person out there, I will admit term insurance is probably better. If you are above average (even if your not) you should have an open mind and educate yourself about what is out there and what your options are to determine what is best for your personal situation. This probably means seeking helping from a qualified professional and/or asking questions.
Related posts:
{ 17 comments… read them below or add one }
Thanks for the in depth answers! I appreciate you taking the time to write out a response.
My original intention was to just write about the differences between the two policies with no bias towards either. I just wanted to give the reader a definition. Evan’s article brings up the popular belief that its better to use a term policy and invest the difference between the term and whole cost. I believe you have to understand your situation, circumstances, and goals. I think there are times when a whole life policy may be a better bet.
Like most of personal finance, there is no one concrete answer to all questions. That’s what makes it hard for people sometimes. But the more information that’s out there, the easier it is for people to make informed decisions.
Craig:
You don’t have to thank me. I should be thanking you for a great post.
I could not agree with you more. I thought your post was great. Provide people with a concept that if they want to open their mind to they can learn more about. That is the best you can do. You can only open the door you can’t make them walk through it and you definitely can’t make them decided whether or not to walk through it.
A majority of your readers will get something out of that post. Don’t be disheartened by people being upset because they’ve been told differently over and over again. Controversy means it is a great post.
Great post! I am with you, and I put my money in whole life insurance policies. I think what people tend to do is look at a product at face value and not how it fits into their entire financial strategy. On the surface, whole life insurance may look horrible. But if you have someone that helps educate you on what it can do and how it can fit into your finances, like my agent did, then your views can change.
Whole life insurance has been here for more than 100 years. There are so many advantages and guarantees. With the correct strategy in place, it can beat the pants off of 401Ks, stocks, and real estate.
What I hope people do is empty their cup so they can be open to new ideas. Once you do that, you can learn so much more.
Keep it up!
Bern:
I couldn’t agree with you more in regards to people being open to new ideas. However, I have to hesitate with your “beat the pants off” comment. To me it’s like comparing and orange to a chicken. If your doctor says you need some vitamin C you’re not going to eat chicken and if you need protein the orange is useless. Of course there are recipes made with both oranges and chicken.
Great post!! You beat me to it!! Why is it that you’re in Mass and I just now came across your site via twitter lol. I think you do a great job here and you had a very objective and open approach to this conversation (which is not easy for a lot of people) so nice work. I love the website and the fact that we have similar goals makes it that much better. Look forward to seeing what else you throw out here and possibly even submitting a guest post of my own.
.-= Nunzio Bruno´s last blog ..When I grow up.. =-.
Nunzio:
I’m glad you enjoy the blog. I have a link for the guest post in the top right of the site would love to see some ideas. Thank you for the the comments.
Good tips Thank you
This post is a wonderful tutor. People have to take time to gain a reasonable knowledge about these terms in order to get maximum out of investment.
Traditionally, I have bought term. And only term. Of course, when I see my 401k doing nothing, I wonder if I should have mixed in some whole life over the years.
I felt compelled to expand a bit on Evolution’s response, especially for those who want to take the time to get a handle on whole life. I wanted to add some info about dividends from mutual life insurance companies. And yes, I proudly work for one of those.
I’m sure Evolution didn’t intentionally mislead with this one point, as he does a pretty good job of X-plainin (that’s for you citishark) how a mutual company pays out a dividend in response to question No. 6, but in his introduction he states: “The dividend interest rate in 2010, for the policy illustrated, is 7%.”
I don’t want people to think that they’re getting a 7% dividend (again, re-read Evolution’s response to No. 6), nor should one think that the company with the hightest DIR (dividend interest rate) pays the highest dividend. The DIR is not a rate of return, and MOST importantly not all companies use the same “formula” to calculate it, so comparing DIRs is pretty much pointless if you’re trying to figure out which whole life policy is best.
Mr. Tube:
You definitely correct. I probably didn’t stress that enough in my answer. Truthfully, the only reason I even put a dividend rate is because I was getting annoyed by him asking for an interest even when I was stressing that whole life policies don’t have one. I probably would have been better off leaving it out as to not mislead people.
Actually, insurance companies do reserve the right to hold the cash value for six months. If my memory serves me correctly, they started this in the ’70s when interest rates were so high. People were borrowing right and left from their cash values to invest in other places earning double-digit interest rates (disintermediation). This adversely affected the policyowners that were keeping their money in the policies by driving the dividend rates down. As such, a six month withdrawal period was implemented to ameliorate some of the pressure on the institutions.
So yes, they CAN make you wait six months, but this would only be done in extreme circumstances.
Joe:
As I said before, they might. I’m not disagreeing with that fact. I haven’t thought twice about it because the companies I work with have all are very responsive to policy holders needs. Actually…I’ll tell you what, right now I’m dialing a very large mutual insurance company and I’ll ask them the question. Be right back.
Okay, the answer is yes. I was told the language is in the contract and of course, the company says they’ve take pride in never having put a hold on access to cash value. I’m paraphrasing, not quoting. Sound good?
I think of whole life as a combination of term life with a savings account added on. term life is just insurance and is much much cheaper.
EOW – great post here. It seems like you know quite a bit about the ins and outs of life insurance. I have not looked in to life insurance in depth, being fairly young (24 y.o) and no children or wife.
In your opinion, would a whole life, life insurance policy be better for younger people?
My Personal Finance Journey´s last [type] ..Does Being Green Make Economic Sense – Part 1 – Green and Hybrid Automobiles
EOW- thanks for your posts.
It’s a good possibility I’m a rep. with the company you’ve used in your illustration. I’m glad you also explained the difference between direct and non-direct recognition mutual companies. I’ve recently encountered a dispute with a Primerica rep via Facebook. It all started with recommending my company as a career alternative. Bad Idea. He proceeds to post several false comments I supposedly made on his facebook wall. He has mentioned my name and company. I’ve also seen a George Boelcke, author of “it’s your money” preparing to use the conversation on his Wednesday radio show. First, none of the comments he posted are true. Due to the high amount of regulations and compliance I am obligated to follow, I make no mention to product type or hand out insurance advice via facebook.
I’m sure your adversary citishark is connected to Primerica as well. So I commiserate with you in dealing with these classless, unprofessionals who are “KoolAid” induced. Probably caused by all the strobe lights at their conventions.
This is a really helpful article. Life insurance is an investment and a valuable tool to lessen the burden of taxes and preservation of your wealth.
{ 3 trackbacks }