There is so much information out there as to why whole life insurance sucks, why it’s a scam, and why it’s the worst financial product ever. It's concerning that a large majority of these claims are on the basis of false information and widely accepted myths.
Let's explore where the confusion lies and get the facts straight...
In our last post, we went over a brief summary of term life insurance. What it is, when it makes sense, and how to customize it to your needs.
This week, it's time to further explore whole life insurance.
The Basis of Our Beliefs
There are a lot of popular voices out there that despise whole life insurance.
To be honest, even I had an instinctual bias towards term coverage as well. I grew up in a household that abided by Dave Ramsey’s principles and only heard how bad whole life insurance was even though I didn’t know why.
In the Netflix documentary, “The Social Dilemma”, which is super fascinating by the way, they say that fake news spreads six times faster than true news.
People love fake news, it’s exciting, it’s fun, but it’s dangerous.
There's a principle in psychology known as the illusory truth effect.
The basis of this phenomenon is that the more times a person hears a lie, even if they know the statement to be untrue, the more they will perceive it as true.
As one researcher puts it, “Repetition is often conflated with reality”.
This principle is extremely popular and abused in politics where the parties have a clear agenda. They will repeatedly make false accusations which become accepted by listeners as fact over time.
If you’re like me, you probably have heard popular voices such as Dave Ramsey or Suzy Orman repeatedly slam whole life insurance, or you may be familiar with the buy term and invest the difference mantra.
Even without a thorough self-evaluation and any objective evidence it’s likely that if you’ve heard these things said enough times, you believe them as fact.
Even if I have logic and evidence on my side, I know I have an uphill battle here because so many voices are saying the exact opposite.
When you type in whole life insurance on YouTube the top two videos that pop are from Dave Ramsey and Marko from Whiteboard Finance.
I’m going to focus on these two people and the information provided in their videos and show several instances where they are clearly wrong.
I have linked all of the full videos at the bottom of the post and want you to know that none of these clips were taken out of context.
Myth 1: No Early Cash Value
Dave, live on the air, encourages listeners to take a look at any whole life insurance policy and claims that the cash value will always be $0 through the first three years.
With a traditionally structured whole life policy this is most often the case, if you don’t know the difference between a well-structured policy and a traditional, check out my last post.
I just wrapped up with a client who is making $60,000 of contributions per year into his policy. Based on his goals we customized his policy for high cash value and in his case, it will result in a higher death benefit long term as well (as is often the case).
With his policy he is guaranteed at a very minimum to have more than $54,000 of cash value in his policy after the first year and by the end of year three he will be guaranteed to have over $169,000.
Here is a snapshot of his policy through those first 3 years.
This illustration does not prove the worth of whole life insurance by any means, but I just wanted to address the fact that you can have cash value early on.
If you’re saying, “But Brody, it’s less than what I put in, why would I ever do that?”
I get it.
I hear you loud and clear.
I have two responses to that.
- You should probably check out the pros and cons post I did because you’re totally right, it is a con in the early years.
- It won't always be that way.
I’ll pull up an example of another illustration where when we look out to age 65, the 35 year old male who is making $1000/mo contributions would have contributed $348,000 into his policy and is guaranteed to have over $486,000 and projected, based on the current dividend, to have over $695,000 in his cash value.
With this client we illustrated it so that he had just stopped making regular contributions at age 65 because that's when he plans to retire, yet the cash value and death benefit will continue to increase.
It seems apparent that they both don’t recognize the ability to customize policies for high cash value and better overall performance.
In fact, Marko tries to claim that it’s totally up to the discretion of the insurance company.
In Makro's video he explains how the premium in whole life insurance is split between death benefit and cash value and claims that you have no control how much goes to each. Saying that you are at the discretion of the underwriters and insurance company.
It honestly bums me out that this is the one of the very top videos recommended for information on YouTube because this is simply just not true.
It may not be common for agents to strategically structure policies, but agents do have full control of how those policies are designed and do get to choose how much of the money goes towards the savings and how much goes towards death benefit and commissions.
The policy illustration that I just showed is not the exception to the rule for how we structure policies and it’s not by accident that they turn out this way.
This is how we structure every single one of our infinite banking policies. They all have high cash value starting in year one!
Most agents don’t sell policies like this, I get it, but stop saying all policies are this way because it simply isn’t true!
I really don’t blame Marko.
He tries to help people with all things finance related and I think he genuinely is trying to help people out and in this case has taken advice from the wrong person.
It’s clear he knows more than the average joe when it comes to financial things, but in this case with whole life insurance, it’s also pretty clear he hasn’t done a deep dive.
Let’s see what Marko has to say about using the savings that you have built up in your policies cash value!
Myth 2: You Have to Pay to Borrow Your Own Money
Marko, accurately explains that if you want to, you could take a policy loan and borrow money from your cash value. He then mocks the absurdity of how borrowing from your whole life insurance policy is, by giving credit to Dave on how he explains it. Saying, "It's the payday lender of the middle class".
Whenever I see someone so one-sided on their explanation and so clearly anti-whole life like Marko is here, I can only assume that they either love Dave, are just repeating Dave, or... are Dave himself.
I at least appreciate that Marko admits to it.
Now in regard to the policy loan, I hate to be “that” guy, but you don’t have to do anything, you get to.
You have the ability to withdraw your money (without taking a loan) from your policy without paying any interest for doing so.
However, when you take it out, if you take out more than you had put in (those gains were tax deferred), by the way, you will be subject to tax on that difference.
Which by the way has better tax treatment than a lot of other vehicles that will force you to pull your gains first forcing you to pay more taxes sooner.
When it comes to getting access to your money, people will often wisely choose to take policy loans because when they do, they can get access to their money without paying any taxes.
Also, concerning the idea of you paying interest on your own money- it’s not your money you’re taking.
It’s the insurance company’s.
You simply borrow against your cash value from the insurance company.
This means your cash value can continue to grow at the exact same rate as it was prior to borrowing any funds. Now this can be different with different carriers, but this is often the case with infinite banking policies.
This means your cost to borrow your money can be offset by the gains you are receiving. Some people call these "wash loans" because you are earning essentially the same amount that you are paying.
Marko recommends a nearly identical process in his video titled “BRRR Strategy- The Fastest Way to Build Wealth"
Marko explains all of the steps to how you can build wealth in real estate by following the BRRR method. He gets to the final R (Refinance) and explains that this R is what makes the strategy so powerful and the best way to build wealth.
He discusses how you once you have built up equity into your rental property, you can go to the bank and loan against that built up equity.
You pick up a mortgage with an interest rate but get access to money tax-free so that you can use it again to invest.
Is it just me or does this sound nearly identical to the way whole life insurance cash value works and specifically the infinite banking process?
You make monthly payments on your mortgage to build up equity, just like you make payments into your insurance policy to build up savings.
Then when you have enough equity or money built up, you pull from that tax-free, but are charged an interest rate so that you can use that money again to get you a better return on your investment.
That sounds identical, minus the fact that if you choose to leave equity in your property, you aren’t earning interest on the equity that sits. However, with a whole life insurance policy, you are earning interest if you choose to just let it sit.
The gurus out there that hate whole life insurance fail miserably at explaining this reality.
I’ll give it to them though- Dave and Marko do a decent job at explaining the rate of return- let's check it out!
MYTH 3. Terrible Rate of Return on Your Investment
Marko and Dave both talk about the greasy whole life insurance salespeople who talk you into whole life insurance for the cash value that they claim will earn you 10-11%.
They both then share a statistic that they have found on rate of return, stating that you should expect somewhere between 1-2% as the actual performance.
They both are absolutely right, 10-11% is a very optimistic and not a realistic expectation for how whole life insurance should perform.
The statistics that Dave and Marko use as the average rate of return on a whole life insurance policy I believe are probably close to accurate for a traditional whole life insurance policy.
However, they seem to neglect the fact that policies can and do perform way better than this when set up the right way with the right company.
To me this seems common sense.
There are a lot of bad mutual funds out there that have lost a ton of money, but that doesn’t make all mutual funds bad.
Dave does at least acknowledge in another video some of the upside potential.
He explains, that after all fees are paid, you should expect a return of somewhere between 3-5%.
Dave is right, after all fees are paid, 3-5% is about what you should expect to return in a whole life insurance policy, not the 10-11%.
The thing is that as a very conservative piece of your overarching portfolio, that’s not too bad.
In reality, you won’t even realize that high of a return until after 15-20 years of having the policy because those fees in the early years take time to recoup.
My problem is that when we go to Dave's site, we can see that Dave recommends instead, exclusively mutual funds.
If we are just going for flashy with a goal of getting people to take action, then I can side with Dave on this suggestion.
However, this would be turning a blind eye to the risks that come with market-based investing and could prove to be ruinous for you in retirement.
Especially depending on your time horizon.
A widely accepted investment rule is to have a portion of your retirement savings in safer vehicles and or diversified in order to compliment the risk of your market investments.
It may provide you lower upside potential, but with the safety and steady returns, it can allow you to hedge your risk to maximize your retirement income with the down years in the market.
For example, bonds are very popularly used to accomplish this.
This false expectation that Dave sets as a standard for rate of return in a life insurance policy is absolutely ludicrous when considering the safety, guarantees, and predictability that comes with it in comparison to mutual funds.
I have to give him credit, he cleverly compares whole life insurance to the stock market, where it stands no chance when comparing based on upside potential without factoring any risk.
I grabbed a graphic that was put together with a quote from albert Einstein that I like and think fits well here. He said, “Everybody is a genius. But if you judge a fish by its ability to climb a tree, it will live its whole life believing that it is stupid”
Let’s remember, whole life insurance serves a different purpose than market-based investments.
It should be compared to your other safe alternative investments such as cash accounts and fixed income options. In fact, I do think whole life can be a great bond alternative that comes with far more auxiliary benefit and flexibility.
Even with the guarantees and ability to access your money whenever, 3-5% is pretty dang good!
Dave manages to make it seem like a huge negative and that you’d be stupid to do that.
Dave gets done explaining how bad of an investment this vehicle is and Marko tops it off by helping us all understand how ridiculous investing in whole life insurance really is with a simple, yet powerful (even if entirely misleading), analogy.
Marko compares whole life insurance to car insurance. He challenges people to consider if they would be foolish enough to ask their car insurance company if they could pay extra for their insurance so that they could invest it for them at a 1-2% return.
Again, this is such a false analogy that I don’t even know where to start…
Marko isn’t doing this for some hidden agenda to sell term insurance so I hate to even put him down, but I do think in this case he is trying to say what people want to hear.
Not necessarily what is accurate.
So, let’s unravel this...
First off, cash value was not created for life insurance companies to invest your money.
This is an important distinction.
It’s a requirement by state law to maintain reserves for the guarantees of death benefit payouts and it's a way to keep your premiums level for your entire life.
Second off, this car you’re driving would have to be the only car you ever get (as is your current life) and once your car decides it wants to stop running (meaning you die, which we all do), it would cause your loved ones a significant financial burden.
Obviously, this is not how owning a car works, but is absolutely true for humans ...for loved ones.
I feel like this is the equivalent of me saying,
“Investing in the stock market is like betting on horse races. I mean you wouldn’t go to the horse races every weekend with your weekly savings as a way to plan for retirement, would you? That would be stupid, right?”
The analogy is distracting enough that it almost seems to make sense.
However, I like to (and I know Dave and Marco would like to) believe that my clever analogy would be a foolish comparison as cautionary advice on market investing.
I’ll jump off my soap box here and move on to let our teachers explain what happens to your cash value when you die.
Myth 4: You Don't Get the Cash Value When You Die
Dave and Marko both agree on how cash value is treated and say that one of the biggest reasons that whole life insurance is so grotesque is because when you die, the insurance company keeps all of your extra savings in the cash value.
I am probably wearing you out with saying this, but I honestly don’t think Marko is trying to mislead people here.
On the other hand, I really am not sure why Dave says this.
Maybe this was the more-so the case 25 years ago when Dave drew a clear line in the sand against whole life insurance, but Dave is still creating videos where he is set in this belief.
Don’t get me wrong, the man has done a ton of good for a ton of people in regard to helping them straighten out their finances.
I mean so much so that he has built himself a multimillion-dollar business and an estimated $200 million-dollar net worth from doing so.
I can’t help but think that because Dave knows he built his business by taking a firm stance on such topics, that it now hinders his ability to have an open mind to the fact that things have changed since his original claims.
In order to properly understand this, you have to realize that if you have cash value and the insured passes away, it is part of the benefit they receive, meaning your death benefit can grow as your cash value does.
This is a very clever way of confusing how whole life insurance works and Dave and so many others make it routinely. I want to explain why it’s misleading and just wrong.
With properly structered whole life insurance policies, the death benefit is increasing as you age.
Oftentimes, your death benefit will actually increase more than even your cash value does with these whole life insurance policies.
The terminology can confuse people because insurance companies don't distinguish your cash value death benefit from your insurance death benefit. They just lump it together to have an increasing total death benefit amount.
They never discuss this reality
Dave was recently confronted by a life insurance broker who has been in the business for over 30 years on the air. The insurance broker is adamant that Dave is wrong in his claim and explains that polices can be structured in a way to ensure that you receive the death benefit and cash value that you have built up.
Dave responds by saying, "None of them are written that way" and "That's not how the industry is set up".
He brushes the challenge off by simply saying that policies aren’t written this way and that it’s not how the industry is set up.
To his credit he at least is acknowledging that it’s possible.
I do agree with Dave that the majority of policies aren’t set up properly, but I would appreciate it if he could be clearer that there are instances where they are.
I frankly don’t even really understand what he is saying here and how he came to some of these conclusions.
I’m trying to give these guys the benefit of the doubt, but this seems like a blatant misrepresentation of the facts and they’re making it hard for me.
If this product truly is really as bad as they say, then surely nobody buys it, right?
Myth 5: Whole Life Agents are the Only People to See Value in It
Well, again a life insurance asks Dave if he knows how many publicly held Fortune 500 companies have whole life insurance and the millions of dollars that the boards of directors authorize...
Dave quickly interrupts at this point and says, "It's really sad that they're all getting screwed at that level."
Dave doesn’t really have a response here, unless you actually believe that these Fortune 500 companies are being lied to on a regular basis and convinced to make what is so obviously a terrible financial decision year after year.
I mean these corporations have decades of experience using whole life insurance. I think that they may have figured out if it’s bad or not by now.
Dave explains why whole life insurance is popular and why it's often sold with a widely inaccurate calculation for how much life insurance agents make by selling it.
He claims that a $100/mo whole life insurance policy would result in about $4000 of commissions to the agent. He explains that the reason you don't have cash value in the first three years (which we debunked earlier) is because it goes to your agent.
If what Dave was saying here was actually true. There would be a lot more life insurance agents out there, I can tell ya that!
This is so far from the truth that I'll let another passionate whole life naysayer, Suze Orman, debunk Dave's own remarks.
She does a far better job of explaining this reality but is still have some comments to make on her lack of clarity.
Suze has a lady call in that is 29 and her husband just got a $350/mo whole life insurance policy and asks for advice.
Suze, not surprisingly, responds passionately against her whole life policy. She then asks if the lady knows how much the agent was paid to sell her that policy, going on to inform her that the agent made nearly $4000.
I loved this example, for a couple reasons.
First off, because Dave just claimed that a $100/mo policy would result in $4000 and now Suze counters it with a $350/mo policy will result in the $4000 in commissions.
A staggerring 3.5x difference.
You know, the difference between making $50,000 per year and $175,000.
Secondly, because I just wrapped up with helping two of our clients that were aged 29 and 30.
I kid you not that they were both contributing exactly $350/mo which is exactly what this client was paying so it’s a perfect comparison.
I called the company that we used for their policies to see how much was paid to Spicer Capital. For one of them it was $287.94 and for the other it was $266.81 (15x less than even what Suze claims).
By the way, even at that, we try to avoid conflict of interest in any way possible.
For our clients that we do ongoing financial planning with, any of these commissions earned offset their planning fee, so really Spicer Capital doesn’t even get to keep them and isn't incentivized to sell them.
To her credit, Suze isn’t making this $4000 number up, some agents can make up to 140% of the first year premiums in commissions so really in a way she is being a little conservative with her projection.
However, with a well designed infinite banking policy the actual commissions for Spicer Capital are about 15 times less than what Suze claims.
Though I still find her argument to have some serious holes in it when she talks about the commissions people make as a basis for why the product is bad, Suze does reveal a real issue that exists within the life insurance industry, or any type of sales position for that matter.
Unfortunately, Suze has to assume that all agents are focused more on commissions than they are helping people. Which I get it, it can feel that way at times.
Despite the fact that Spicer Capital earns so much less and that I’m on a salary instead of commissions, I still think a lot of people should be taking advantage of properly designed whole life insurance!
When all else fails and Dave is pinned in a conversation, at least we know we can always rely on his tactful candor.
Dave resorts to being rude and dishing out insults that seem mildly inappropriate for a discussion on life insurance.
Now some may call it passion, but maybe, just maybe, whole life naysayers like Dave portray themselves as being your hero, saving you from evil life insurance agents for a different reason entirely that is hidden in plain sight…
"Sign up for Term Life Insurance Today!"
I hope you gained value from this post and I want you to know that I am not anti-term life insurance or anti Dave Ramsey or Marko. I think generally speaking both are good for a lot of people.
Back in my early days in the financial services when I was primarily selling life insurance, I sold a ton of term life insurance. Even to this day when people come to Spicer Capital for their life insurance needs, we will recommend a term policy for a large percentage of those people.
The reality is that if I were speaking to the masses and had to say yes or no to whole life insurance without being able to explain myself, I would probably agree that generally if you are looking for life insurance, term is a fantastic option.
If you came to me and said that an agent was selling you a whole life policy and you had no more details for me to evaluate, I would advise you not to move forward.
However, a lot of that has to do with how a traditional whole life insurance policy is set up, what your goals are, what expectations you have, and knowing how significant the difference is with a properly structured infinite banking policy.
I did a shocking comparison between infinite banking and traditional whole life insurance last week, I hope that you check that out!
On Tuesday, I will be doing a brief overview of whole life insurance. What it is, when to use it, and how to customize it to your needs.
If you want stay on top of the content and learn more about financial strategies that will help you plan and protect your financial future, then you should check out my YouTube channel as well as Stephen Spicer's.
Until next week,
Take care!