Is Whole Life Insurance a Bad Investment? (Book Excerpt)

In December, we announced the launch of Kim’s latest book, Busting the Life Insurance Lies, co-authored with Jack Burns and James Ranson. Below are two excerpts from the book, one from Part One. First, we include the conversation that sets up the first several lies and shows how each lie is related to real-world myths and concerns as seen through the eyes of a family. Next, we jump straight to Lie #1, “Life Insurance is a Bad Investment.” This is the first of 38 lies and half-truths “busted” in the book.

A Family Conversation Around the Dinner Table

Kara found herself sitting a few places away from her father. “Dad,” she called across two cousins, “I was asking Mom about life insurance just now, but we got interrupted. How does yours work?” “Oh no, not insurance!” groaned one of the cousins in between them before Bill Harding could answer his youngest daughter. “As if we didn’t have enough to spend money on already!” “Right?” put in the other cousin. “And you gotta pay so much to it, it’s a wonder you’ve got any left to live on. I know a guy who only eats ramen because he’s got such high premiums to pay. Imagine having to live on ramen because of insurance! It’s ridiculous.” Noticing both cousins shoveling down stuffing and mashed potatoes as if facing a three-month famine, Kara doubted either of them could actually imagine living on ramen. She very carefully did not say this out loud. Instead, she looked past them to her dad again. “Dad?” “Well, K, we have a policy called a whole life insurance policy. It’s–” “Say, don’t those policies have terrible returns?” This came from Kara’s brother-in-law, Chad, sitting across the table from her. “I hear the way to go is to invest, make a bundle for yourself, and then bam, you’re set for life. You don’t need insurance when you’ve got money invested!” “You sure about that, honey?” asked his wife, Kara’s second-oldest sister Jeanne. “I thought the safest place for money is in a bank. That’s got to be way better than an insurance policy, anyway.” “Make more money investing, but yeah, sure, both are better than insurance,” Chad said around a mouthful of turkey. “All the insurance companies are the same: out to take your money. Why do you think they get such big commissions?” There was general nodding in response to this declaration. Kara noticed her father didn’t join in. “What do you think, Dad?” she pressed on, silencing one of the cousins with a glare when he attempted to interject again. “Well, K, I think this dinner table’s a terrible place to tell you what I think. It’d take me till dessert just to respond to what everyone’s just brought up, let alone tell you what your mom and I use and why. Why don’t we do this: tomorrow morning, after the kids go out sledding, let’s you and me and your mother and Stephen refill our coffee and talk about it then…. I’ll bring the cinnamon rolls.”

Lie #1: Whole life insurance is a bad investment

Probably the first and loudest lie we hear is that whole life is a lousy investment opportunity. People say this one all kinds of different ways:

• The rate of return is poor, I can do better investing elsewhere.
• If I buy life insurance I’ll lose out because I can’t invest elsewhere.
• I have to die to get any value out of life insurance, so I’ll invest elsewhere.

When people hear statements like these, they tend to jump ship and pursue other investments…without actually checking to see if any of them are true or not. And they end up missing out on all the huge advantages that come with whole life. First of all, we don’t feel like whole life should be called an investment in the first place, because it really isn’t one. It doesn’t actually invest in any market, it isn’t dependent on stock market swings, it doesn’t require a broker or financial advisor to manage it, it has much better liquidity and accessibility, it’s much more likely to pay dividends, it provides a death benefit, its fee structure is very different, its growth is tax-deferred as long as it stays in the policy…the list of differences goes on. A whole life policy is not an investment, but it IS an asset of the highest quality. It’s a place to store liquid cash that also provides immediate protection benefits. It’s permanent life insurance, AND it’s the best long-term savings vehicle we know of. Not only does calling it a bad investment belie its relatively strong rate of eventual return, calling it an investment at all creates confusion around what whole life is, why you’d use it, and how to compare it to its alternatives. Now about that return: if the rate of return is bad…compared to what? Once a whole life policy gets some cash value built up, its annual rate of return (AROR) actually rises higher than most liquid vehicles’ rates ever will (savings accounts and money markets). The growth of cash value inside whole life policies settles at about 3.5-5% (depending on age, health, and other factors) as of this writing in 2016. (You can ask your advisor to calculate your policy’s exact rate–it changes each year depending on dividends.) Now, 3.5-5% may not impress you, but understand that cash value is a liquid, tax-advantaged asset that can never drop in value, like so many other investments. Taking the midrange of 4%, it is actually better than anything you’d get with typical liquid accounts like money market accounts (currently 0.2%) and treasury bills (currently1.7%). And it’s much better than a bank savings account’s return–as of this writing, bank interest rates are sitting just above zero. So with time, the return on whole life becomes stronger than many other options. (For a visual calculator comparing life insurance to an “alternate” account, see Appendix G.) Plus, don’t overlook the death benefit! This is an immense “return” that a whole life policy gives immediately and permanently as soon as you pay the first premium. Too often, self-proclaimed financial experts, gurus and bloggers neglect to include the death benefit at all when comparing whole life with other assets. Of course, this skews build over time. There’s nothing wrong with a diverse investment portfolio–we’re not saying insurance and investing are mutually exclusive or that you should do only one at the expense of the other. If you have the resources to do both, by all means do both. In fact, a whole life policy can actually help you invest. Some advisers recommend whole life as a highly effective diversification strategy that can strengthen overall returns and safety while making distributions from market-based retirement accounts more efficient. (After all, you don’t want to have to liquidate stocks when they’re down, do you?) You can also use your cash value as collateral for another investment, or you can lean on it as a safety net if you run into any investment issues. For instance, real estate investors have a high need for liquidity for repairs, vacancies, and down payments on new properties. Whole life is a fantastic place to grow and keep cash that can be easily borrowed against. This is why whole life insurance is an “and” asset, meaning you can have cash value for emergencies or opportunities and use it to invest in other things. Compare that to a 401(k) or 403(b) retirement plan as an example. We call those “or” assets, because you can either invest in them, or you can keep your cash liquid. With these products, you’re essentially putting your money in a box and throwing away the key. Try to get anything out of a 401(k) or IRA before age 59½, and you’ll likely pay significant penalties. This is why, if you only have the funds for insurance or investing, we’d recommend starting with insurance. You’ll want to build your savings and emergency fund first so that you don’t end up liquidating investments for car repairs or medical bills. Not only should you start saving BEFORE you invest, but you may also want to put some protection in place, especially if you have a spouse or any dependents. This is another way that whole life is an “and” asset…you’ll be protecting your income while you’re saving for the future! Finally, if you’ve been wary of life insurance because you’ve heard that you have to die before you get any value, hopefully you now understand this is not true. While many investment products (even good ones) are designed so that you DON’T have access to your money, whole life is just the opposite. It’s a financial foundation that is designed to be used…your whole life. If there’s one thing we’d like you to take away from this book, it’s that life insurance is a tool for improving your life, not just covering for your death. No financial vehicle is as useful as whole life for emergencies, opportunities, investments, for providing your own financing, permanent protection for your earning capability, or for your peace of mind. We hope you enjoyed this excerpt from Busting the Life Insurance Lies! Kim uses books in her practice to leverage her time and educate clients, often in combination with Truth Concepts (especially the Whole Truth videos in regards to life insurance returns or comparing mortgages, as she explains in our last post.)  Busting the Life Insurance Lies is available on Amazon in paperback and also in a Kindle ebook version. (Audio book to come.)