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.