A 4-page special advertising section in the Wall Street Journal yesterday trumpeted “The Resurgence of Whole Life.” The sub-heading read: “As markets waiver, more people turn to cash value life insurance to diversify their investment portfolios.”
I happen to be a believer in high quality, carefully designed whole life type of policies for the right situations, but this conviction is conditioned on some important qualifications explained below. In any case, the claim of a whole life “resurgence” is a gross exaggeration in light of recent statistics from LIMRA (Life Insurance Marketing and Research Association) documenting a substantial decline in overall life insurance sales this year, and a single digit drop in whole life business.
Because the dip in whole life sales was much less than for some other types of policies, especially variable life that typically involves an underlying investment in equities, the claimed resurgence is based simply on the less dire results for whole life.
Anyway, what about whole life and the place that life insurance agents and companies suggest that it should have in one’s portfolio? In fact, the best products from the best companies designed in the most efficient way and owned for the right reasons can make a lot of sense for many people who can afford them.
You’ll note, however, that this last statement is highly qualified. It depends on several conditions: (1) best products; (2) best companies; (3) designed in the most efficient way (i.e., to reduce or even avoid the drag of typical sales commissions and thereby to increase short and long-term cash values and eventual death benefits); (4) owned for the right reasons (i.e., not solely as in investment); and (5) the ability to pay the premiums. Without conditions 1 through 3, you’ll have a poor, or at best mediocre, investment return of the cash value that whole life promoters tout.
Our firm’s website contains similar and more specific advice on how to make whole life insurance a good investment. Under the conditions I’ve mentioned, it can dramatically outperform similar investments on an after-tax, risk-adjusted basis. But you have to know what you’re doing, and the odds of finding that out from anyone in the business of insurance sales are, at best, very remote.
#1 by Brian Fechtel on December 9th, 2009
Hi, David -
Was just visiting your blog and wanted to drop you a note.
Would like to speak with you later this week about your blog. I’ll call you tomorrow.
Cheers,
Brian
#2 by Todor Mazgalev on March 1st, 2010
Dear Mr Barkhausen:
I noticed your name cited in the yesterday’s WSJ (Feb 27-28, 2010) article by Leslie Scism regarding the worthiness of whole-life insurance as an investment option. I assume you have not edited this piece. Specifically, I have found that the provisional example given at the end of Ms. Scism’s article (allegedly “worked out” by you) is at best confusing. I inquired about it but the author directed me to you.
In the example, a 40-year person buys $1 million policy, and is required to pay an annual premium of $17,750. After 20 years (i.e., after investing $355,000) the buyer’s cash value is given as $518,068 corresponding to 3.8% annualized return on the deposits.
What appears missing in the above example is the life insurance itself. Assuming that the buyer dies at the end of the 20-year period, one is left with the impression that the beneficiaries will pocket (subject to taxation) the $518,068 PLUS the insurance’s face value of $1,000,000, for a total of $1,518,068. This would make more than 12% annualized return.
The article also does not address at all variable life, does not distinguish between whole and universal life etc. I participate in a group-variable-life-insurance (GVUL) for which my employer pays all premiums. The insurance has an attractive underlying investment in equities (or a fixed-return) that provides tax-free growth up to the policy’s cost basis (deposits + premiums). However, even though the annual premiums are currently in the range of $3,000 – $4,000 (which is miles away from the above cited $17,750), it is questionable if there is any sense to assume those premiums upon retirement when they will grow fast and eventually may reach the premium cited in the above example. The premiums expenses will negate all other advantages.
Thus I have to agree with your more judicial and qualified approach. I will read carefully and follow your website.
Thanks,
T. Mazgalev
#3 by David Barkhausen on March 3rd, 2010
Mr. Mazgalev -
You’re correct that the article focused on the cash value return on the premium investment, including, through my comments, how that return can be significantly enhanced by structuring the policy to reduce commissions. The tax-free returns from the death benefit of such a policy would be significantly higher at life expectancy or beyond than the figures mentioned.
Ms. Scism said her article was limited to 700 words, and she could not address all the policy variations you mention.
As for your own group variable policy, it may be that it is not worth investing more than the employer’s term cost in this policy, or in retaining it after retirement, if the insurance charges will increase dramatically at that point.
Let me correct the common misunderstanding that policy beneficiaries collect the cash value and the death benefit of a policy. Either the owner receives the cash value upon a policy surrender, or the beneficiaries receive the death benefit – either or, not both, except in the case of a partial surrender with some of the death benefit remaining in place.
Thanks for your comments.
David