Whole Life vs. Invest the Rest

I realize this topic may have been beaten to death, but here it goes. Our family income is about 245k, I am 36 and my wife is 35. We have one child. We are maxing out our 401ks but are now wondering what's next? We are planning on retiring at the age of 55 - 57. So we have about a 17 to 20yr horizon. I have been talking to a NWM rep for the last few months and he wants me to sign a whole life contract, which we will be able to tap into for income until age 59 1/2. Reading several postings on this forum has lead me to believe the whole life policy may indeed be the best choice but it is so limiting and inflexible. What if my wife wants to go part-time etc? Regardless I think we can make the payment but still...Anyway, on to my question. Am I better off going with the whole life policy or should I take the same available cash and throw it into a no load mutual fund or ETF? Or perhaps a combination of the two?

thank you all for your help in advance.

In addition to reading the other posts which I applaud you for, I will try to keep this as simple as possible and in an easy to understand concept.

If I said that if you purchase a $10000 CD from me every year for the next 20 years at a guaranteed interest rate competitive with other CDs, and in addition to the guaranteed interest rate (no lower than 4%) I will throw in tax deferred growth and a permanent death benefit of $1,000,000 would you do it?

Then, if I said you can withdraw your initial investment (plus interest) tax free for the next 20 years and still have close $1,000,000 of permanent death benefit without further payments, would this be of interest to you?

The moral of the story is that the value is in the insurance itself. You can't compare it to investments geared for growth. You have to compare it with other financial options that offer guarantees: CDs, Money Market, Bonds, etc. Whole life is guaranteed. Investment returns on stocks, ETFs and mutual funds are not. In fact, whole life will continue to pay into your plan in the event of disability. Again, investments will not continue to fund themselves and tend to be raided for expenses in the event of long term disability.

With this said, it makes sense to view a whole life policy as the conservative/cash portion of your OVERALL financial portfolio. Treat the premium allocation like bonds, CDs or high yield money market/savings. If you like the idea of saving $5000 a year tax deferred in bonds or CDs, then there is absolutely NO reason why a $500,000 whole life that costs $5000 a year isn't a smart financial decision. You will achieve the same investment returns, but you will leverage the cash assets to the moon in the event of your death.

As for the merits of whole life, it is hands down THE best choice for anyone considering permanent insurance. There are essentially only two types of insurance: Term and whole life. Anything in between (UL, VUL, IEUL, ROP term, etc.) are all a compromise to some degree in guarantees, with the potential for better returns very rarely being worth it.

Your Northwestern guy knows what he's talking about as far as the best permanent option.

I just wanted to mention that the scenario above is for a straight, scheduled premium only. I didn't even venture into stuffing the tax free corridor with cash (overfunding). I'm sure your NW guy will bring you up to speed.

If you do want to overfund it, just remember the idea is to stuff the maximum amount of cash into the smallest initial face amount possible. In other words, if you have $10000 in annual premium that you can commit, purchase a policy that costs $5000 in scheduled (mandatory) premium and the other $5000 goes straight to cash, essentially diluting the underlying cost of insurance. Your Internal Rate of Return (IRR) will increase 1-3% over the life of the plan...and all tax deferred with the possiblity of a tax free income.

just remember the idea is to stuff the maximum amount of cash into the smallest initial face amount possible. In other words, if you have $10000 in annual premium that you can commit, purchase a policy that costs $5000 in scheduled (mandatory) premium and the other $5000 goes straight to cash

sean, just to be clear. the face amount (which will drive premium amount) should be sufficient for your family's protection FIRST. secondly, whicker the policy to have a projected face amount for your needs at your anticipated mortality date (this is a harder figure to come to, but your rep should help you do an estate valuation ... especially with an income the size of yours).

in other words, if you can afford a yearly premium of $10K but your insurance needs will cost you $7500, then you can only overfund the policy with an extra $2500 a year. do NOT lower the face amount to get a better leverage on the interest rate.

pricespector's answer was spot-on. i offer the clarification since you are kinda new to the concept and i could see room for misunderstanding.

Price,

The 3-4% growth figure has always confused me. (Heck, I'll be honest - I've always felt downright misled.) Let me use your $10K CD example.

$10K in a CD will get me $10,400 after a year. The $10K I put into my par whole life policy after the first year left me with around $7,000 (cash value). My admittedly simple brain says I'm in the hole with whole life after the first year. And in my plan, I don't get out of the hole till maybe around year 8 - and I'm overfunding to the max. So when I hear hypotheticals like your CD/Whole Life comparison, I'm always left saying "Huh?" I mean, my brain looks left and sees $10,400, then looks right and sees $7,000.

I love you guys and I know you're trying to steer us straight, I'm just trying to make all these numbers "add up". Now if I tweaked your scenario a little and I said: Give me $10,000 and I'll put it in a special kind of CD. The value of the CD will grow at 4% but it won't start out with a value of $10K, it will start out at a value of, say, $5K. And that $5K will grow at 4%. And of course, the other $5K is COI.

...That's a scenario I can follow.

It's just that in your example, I'm thinking "Great! 10K becomes 10,400, and so on, and so on... and if I die, my beneficiaries really hit the jackpot." If that's really what you're saying, then I have one crappy performing policy.

My wife and I both have 20yr term insurance at 750k. With that said he is suggesting the following; 300k WL and 200k Term (slightly lower for my wife's contract) at a yearly cost of about 13k, 8k for me and 5k for her. After talking we figurd the 13k a year is as much as we can afford, for now. After reading all of the other posts on both sides of the arguement I think this is a no-brainer for us becuase of the tax benefits and although not garunteed, the 80 some odd years of 8% "growth". My only issue was the 17 to 20 yr timeframe. Is that enough time for the whole life policy to begin "winning" the race vs. other investments. I realize that I may be comparing apples to oranges but that is truly what I have to ask myself right? $1100/month into a S&P 500 "fund" that pays about 8 to 10% over the same 20 years vs. $1100/month I pay into the whole life policy at say 8.0%. At 56 years old when I need to use this "income" will I have more in my taxable account at Vanguard or will I have more cash value in the whole life policy? Regardless of the answer to that question I plan on signing up for the whole life but perhaps for a smaller amount a yr and investing the rest into a tax effecient mutual fund.

Does this make sense at all?

Thank you guys so much.

bdunklau,

The calculated returns on a whole life aren't annual as most people are accustomed to. The overall returns on a whole life are calculated using Internal Rate of Return (IRR). IRR is the overall return realized over a series of equal or non-equal payments in which part of the payments are not credited directly to the account until a later date. The IRR of a typical whole life is negative until year about year 10 when it begins to grow positive.

For example, in year 3 the IRR will be about -25%, but in year ten IRR is 0, then year 20 is 3.5, year 25 is 4%, year 30 is 4.25, and year 40 is 4.6%. The concept of not realizing the return for such a long period of time is what most people have a hard time adjusting to. We are a society of immediate gratification, and as such we all like to see increases each year from day one. However, in year forty the overall return will be the same exact result as if you had invested in a CD paying 4.6% from day one.

Now, an overfunded actually dilutes the cost of insurance and raises the IRR. For example, when you match the mandatory premium with the same amount of overfunding, your IRR goes something like this: Year 3/-20%, Year 10/2.3%, Year 20/4.4%, Year 25/4.76%, Year 30/4.93% and finally year 40/5.1%.

What IRR tells you is that the resulting cash value is equivalent to investing in the corresponding compound rate for the period examined (investment:length in years).

Hope this clear things up a bit. The overall result is the same, but you have to wait to realize the same returns. Don't forget, for the entire time you have a permanent death benefit as well.

My wife and I both have 20yr term insurance at 750k. With that said he is suggesting the following; 300k WL and 200k Term (slightly lower for my wife's contract) at a yearly cost of about 13k, 8k for me and 5k for her. Your income is $245k and you only have $750k of coverage? How large is your mortage balance? Who would take of your child should something happen to one of you and the surviving spouse no longer has a choice to work or not? The face amount of protection seems terribly low for a couple with one child in your income bracket. Now, you are thinking of reducing it further to $500k? Whole life is nice, but as 1MO said, DO NOT sacrifice protection for cash values. Most people in your income range carry at least $1mil and up to about $5mil in term insurance alone. My suggestion at this point would be to examine your exact protection need first. If all you can afford for the proper amount of protection is 20 year term, then so be it.

With that said, you may want to consider smaller permanent policies and perhaps a dramatic increase in your term protection.

sean, by my rough calculations, you should be putting between $1000 and $2000 per month into you and your wife's insurance premiums. price is again right on the money in that your present protection "seems terribly low".

further, it seems that your NWM rep should have done a needs analysis that both indicates the amount of coverage you need and offered solutions on the mix of insurance to cover same. if he or she has not done this, then you need to demand it.

I have 750k in term and I am now considering an additional 500k in whole life perm. insurance. I am looking at the paperwork and it describes the coverage as 300k WL amount and 200k initial term amount for a total of 500k.

My wife makes 145k and I make 100k+ bonus. I am not sure why we would need more than 1.25mm in insurance? The 245k a year is a relatively new development, I have been putting my wife through law school far the last few years and paying down debt etc...We now have zero consumer debt, a 400k balance on our home, one car note and some student loans with an interest rate of 3%. The 1.25 will pay off the house, pay off the car, and leave plenty of cash for a college fund. I am pretty sure my wife can find a way to live off of 145k a year, even with the dispair of living w/o me. :-)

So with that said, are my concerns regarding the shorter timeframe make sense? Also, your point of overfunding is a great one and we plan on doing this as well going forward...That is where a portion of my yarly bonuses will go.

Ah, now that makes much more sense. I was under the initial impression that you would be replacing your $750k with $500k. Your $1.25Mil puts you well inside the ball park considering your spouse's earning power and that the mortage and other debts can be paid off.

With an income of $245k currently, do anticipate that this will decrease in years to come, stay the same or increase???

At 36 and 35 years young, you have approx. 20-30 years left in the workforce (averaging). I would cover my NEED for MONEY for the next 30 years should something happen to you.

What size check would your wife need to replace your income every year for the next 30 years without touching principle? Based on my rough calculations, you could spend anywhere from $4,800 to $8,600 on a 30-year term insurance policy for $5mm of coverage depending on health. This is just a starting point without knowing anything about you. (maybe need less)

So that said, if you are in average health, would you be interested in securing your current income for your wife and family for the next 30 years while your retirement, social security and pension grows to the max levels in the event something happens to you?

You can secure your $250k per year for the next 30 years and give her/family a nest egg of $5mm on top of the $250k per year for future generations. Instead of making $245k per year, think of it as making $237k per year but guaranting your income for the next 30 years.

After paying off all debts etc...I am not sure why I would need a $5mm insurance policy but I digress.

Guys, I have been working with 3 advisors, one standard advisor (stock account) and 2 insurance advisors (NWM and Phoenix). I know most of you would have nice things to say about NWM but what about Phoenix? I am weighing my options and I am down to NWM whole life vs. the Phoenix UL/VUL?

thanks guys

Your choice has much less to do with the company than it does with the insurance vehicle you are considering. The question your are posing is ACTUALLY whole life vs. UL/VUL. Whole life typically offers absolute guarantees concerning your cash values where neither one of the others do. VUL is great if you can consistently overfund it to the maximum. UL is like a lame puppy when compared to either of those. It's good to have around when you need it, but it's sad to look at.

What I do know without even knowing you is that you can't go wrong with a NWM whole life. The others can be full of pitfalls.

its in my nature to be a bit disagreeable. i would state that the MOST important factor in making this decision is in fact the advisor. who is it that is giving you the best education and advice in helping you understand your options? based on your last post; and please forgive me, but it seems like it is pricespector who is giving you the best education.

it sorta blows my mind that you are considering ONE product from ONE firm and ANOTHER product from ANOTHER firm. this implies to me that perhaps neither one is really giving you the true education you need for proper comparisson.

after you have found the best educator and advisor, then that person should be able to offer you the product comparisson you need. in my never humble opinion, if the advisor at NWM thinks that you should be using a phoenix product, then that is what they should get you. conversely, if the phoenix advisor thinks you should be using NWM, that is what you should get.

now, i can virtually guarantee that the Pheonix guy doesnt have access to NWM and i am pretty confident that the NWM guy cant get you the Phoenix product.

so, i would seriously consider working with someone who can offer you a decent comparisson. if your present guys do this, keep on truckin. if not, you can interview someone else until you either find the right person or you determine one of the two original advisors really was your best from the start.

also, to be clear; i like the fact that NWM has the BEST POSSIBLE RATINGS from all the independent rating agencies. Phoenix averages about the 6th best rating. in my opinion ... that kinda sucks. but, i am biased!

if you are looking for both quality of product and choice amongst companies, you may consider looking at a couple of other companies. New York Life or Mass Mutual or Raymond James.

Great points guys. It is my understanding that NWM offers one the best WL policies in the business but thier investment vehicles inside their VUL's are lacking, but perhaps I jumped the gun. But I will say he thinks the WL is the way to go, so I guess that is why I searched out another rep's opinion.

I took a look at the ratings of Phoenix and I was very disappointed to say the least. I really like the rep though and she does a good job explaining things, but I am not sure I can get past the ratings. Their mutual funds seem to perform well however...

Anyway, perhaps the best course of action is to find a company that offers excellent WL and VUL policies. I will take your suggestions and press on.

Oh and Yes I have abandoned the idea of investing the rest. Although I am going to sit down with the financial planner from one of the big banks to hear him out anyway.

thanks guys for keeping me straight.

35 and 36 and making a quarter mill a year and you need some level of coverage. it really sounds like VUL could be a wonderful opportunity. i say that and most here know i generally recommend against VUL and i absolutely adore WL.

good luck!

Thanks, you surprised me with that one...After reading most if not all of your posts, I am a bit shocked. But like you always said it depends on the client. You are one heck of a guy to help us all out and I hope perhaps one day I can return the favor.

Just found the link to the VUL discussion and I must correct myself, you did indeed mention that you like VUL. Regardless, thanks

i like it all ... when used for the right purpose. in my opinion, VUL has the narrowest range of use. i think you (unlike most) fall into that range of use.

and you are welcome.

Sorry guys but I am back. The NWM guy is suggesting their Adjustable CompLife policy? Do you know anything about this? My wife is a having a real issue with WL due to the inflexibility. I suggested the VUL idea but he says it is very complicated and can hurt you down the road. I assume he is suggesting that people vastly under fund if given the chance? But I am not sure why ACL is any different. I know he is supposed to be explaining these policies to me but I would still like a 3rd party's opinion.

Any thoughts?

thanks

I'm just going to stick my neck out and guess that "inflexible" to your wife means "I don't like the idea of having to pay $xxx every month whether I like it or not. I'd like the option of not paying some months, or maybe paying less in some months." Or perhaps "inflexible" to her means "I don't like not being able to direct how my money is invested. I want the say-so."

Last point first - I personally don't want to direct how my money is invested. I have the anti-midas touch - everything I touch turns to crap. So I'm fine letting the pros at my insurance company deal with that.

And to my first point - Not all WL policies are the same. I consider mine pretty flexible. I decided to overfund my policy to the max by buying PUA's. And since my policy pays dividends, I get to decide what to do with them. I decided to use my dividends to buy more PUA's. And because of these decisions, I'll have the option of never paying a premium out of pocket again after the 5th year ...but I can if I want to. Right now, I plan to sell back the PUA's to make the policy "self-sustaining", but I could change my mind when the time actually comes.

A little further down the road, I'll get to decide how I want to use/access the cash value of the policy. I could leave it alone. I could take out a loan using the cash value as collateral. Or I could actually take cash out of the policy (with the IRS's blessing).

My personal strategy is to use my WL policy as a sort of a "third party financing entity" - a bank of sorts. The next time I buy a car, I'll finance through my WL bank, instead of someone else's bank.

I'm not here to hawk a strategy or sell some policy (I couldn't if I wanted to). I'm here to dispel the myth that WL is this rigid, inflexible, my-way-or-the-highway kind of thing.

And personally, I like par WL over VUL because while I do like options, I don't want the option of imploding my policy due to stupid financial decisions.

Agent: Bdunklau would you also like the option of driving your cash value and death benefit down to zero?
me: No thank you

BD, I hear ya. She does not have an issue with who or where they invest, she would not know the difference. She is concerned and so am I about not having the cash to pay the premium for an extended period of time. Perhaps I need to understand the WL options a little better. Just seems to me that a WL policy is much more inflexible than a UL or VUL. I understand that some people can under fund the UL etc and find that they have nothing for their trouble....But I am not that type of person. I was all on board with WL until the credit crisis and the real possibility of losing my job. See employees of Bear Stearns....Thanks for your response and I will read up on the WL flexibility issue.

From your initial post, it sounds like you're more interested in investing your money than in the death benefit that insurance provides. It sounds like you're interested in growing your money. I can speak authoritatively about my WL policy, less so about WL in general, and I can shoot of at the mouth about VUL.

The cash value of my policy isn't even projected to reach what I put in until around year 8-9, and after that, I dunno, about 3-4% Is that a good investment ? Of course not.

The VUL guys will talk about what great returns you can make. But the fact that neither the cash value nor the death benefit is guaranteed would leave me wondering, "Then what the hell do I have?" The other thing that scares me about VUL (remember, shooting off at the mouth)... is playing catch up. If money becomes tight (and you're telling me it very well might for you), maybe you can slack off on the VUL payments for a while, but I'm guessing eventually, you'll have to play catch up. Playing catch up sucks big time, no matter what you're trying to catch up on. And with VUL, I think there are some pretty serious "or else" consequences.

Something else about VUL I personally don't like: increasing cost of insurance. I don't like things that increase. I like my level WL premium. To me, VUL seems like mixing gambling with insurance - except that every year, you have less and less to gamble with because more and more goes to COI. This is why people who know VUL will tell you to overfund in the beginning as much as possible. It sounds like you can really get behind the 8 ball with VUL. My agent has told me he knows plenty of people who lost their ass in VUL's.

A coworker down the hall recently surrendered his VUL policy after about 6-7 years. Why? A couple (bad) reasons. Bad reason #1: He didn't know what he was getting into when he bought the policy. His agent touted these great returns and what a great investment it would be - blah blah blah. Over time, agent proceeds to churn coworker's investments, cutting into returns. Coworker starts to think "I didn't know what I was doing when I bought this policy. It doesn't seem so hot anymore."

Which leads me to Bad Reason #2 why he cancelled - BECAUSE DAVE RAMSEY TOLD HIM TO. Some guy on the radio he'll never meet, some guy with a one-size-fits-all solution says that all cash value insurance is trash. Thanks to Dave, no one, including my coworker, will ever know if getting in was the right decision and no one will ever know if getting out was the right decision. He got in because someone told him to and he got out because someone told him to. All I know is: At least one of those decisions was wrong. When you're talking about thousands of dollars, you don't want to make bad decisions.

I found out what kind of policy I bought after I bought it. Not smart. But I'm glad I took the time to figure it out rather than listen to Dave and Suze. Otherwise, I would have undone what turns out to be a good decision with a really stupid one.

Don't count on insurance to produce investment returns. Count on it to produce savings account returns in the 3-4% range. Hey, everyone needs a conservative/cash portion in their portfolio (see the 2nd post in this thread). That's what the cash value in a life insurance policy is. Instead of going to ING Direct, I went to my life insurance company. But unlike ING Direct, which will only pay my heirs what's in the savings account, with life insurance, they'll get a whole lot more.

Check out the "Infinite Banking" thread on this board for an interesting way to use cash value insurance. It's the thread that I started when I was trying to figure out if I got taken or not. If you do decide to check it out, ask yourself this question first: What if I owned a bank and I needed a loan - would I get the loan from my bank or would I get it from someone else's bank?

Excellent points. I will not sign on the dotted line until I understand what I am buying. It is my belief that I can have my cake and eat it too. There is no reason why over 25 years that I can not make 6 to 8% in a VUL or WL. Can I make less? Sure but I could make less in a taxable account too with no death benefit. My research will continue....But I AM getting permanent insurance that I know for sure, the numbers do not lie...Over a very long period of time WL or VUL will beat out a conservative taxable account. The question is if my income goes down for a couple of years what is the best policy to look into? I could run the numbers assuming the lower income, make sure I can afford the payments and if my income does not go down or if it goes up I can over-fund the policy (not allowing it to become a MEC of course)? Just a few things to consider.

Just thought someone might know what the ACL contract is with NWM. Sounds like aflexible WL policy??

thanks again for the post. And I will take a look at your thread.

Northwestern's Adjustable CompLife policy is a combination of whole life and term insurance. The base is whole life, and is usually at least 50% of the face value. For example, you start with whole life base of $100k and have a $100k of term as a component for a total face amount of $200,000. Since the whole life policy is dividend and interest paying, the face amount of the base whole life policy will gradually increase to keep pace with inflation. As the face amount on the whole life policy increases a portion of the term is taken away.

The idea is that when the base whole life policy doubles it's face value (20-30 years or more), the term will have been completely replaced by the permanent insurance. Overfunding the policy will rid the policy of term insurance even quicker because the face amount on the bsae whole life policy will grow faster. In the end you will have a whole life policy with a face amount of $200,000 and no term component.

New York Life has a similar product called Dividend Option Term, or DOT.

In my honest opinion, mixing insurance types just convolutes the original intent and often prohibits getting the most out of a specific product. In this case specifically, borrowing from your policy will have adverse effects on the cost of the term component and policy growth, which is key to getting rid of the term portion in the first place. NWM does not credit dividends against borrowed cash values. In any case, the cash values will not grow as fast because some of the funds will be supporting the term portion. Keep the whole life streamlined and don't bog it down with add-ons and/or variations. Simple, guaranteed, and good.

You have your own best solution already. Your last post on running the numbers on income prospects and not biting off more than you want to chew is the way to go.

BTW, whole life is only relatively inflexible for the first 2 or 3 years. After that, it's one of the MOST flexible with no sacrifice of quality. If you lose your job for a year or two, you can simply decide to pay part or all of the annual premium as a loan against your cash value and replenish it at your leisure. Obviously, this is not a good strategy, but it can definitely provide the temporary relief you might need. In fact, the longer the policy exists and the greater the cash value, the more flexible it becomes.

Thanks Price.

I think I answered my own question? I will simply reduce the monthly investment to a point that I can afford regardless of what my wife decides to do. I can always over-fund and or have them write another policy in a few years when I have a better handle on my income situation. I guess I was caught up with the idea of setting up one policy and being done with it? Maybe I still can. Does WL allow you to increase the death benefit if your income grows? I am sure it does.

Anyway guys you all have been a tremendous help.

Actually, a NWM ACL policy is a very flexible policy. If I was going to go with a product from NWM, I would probably choose their ACL.

-Joe

I often speak about using whole life as the cash equivalent portion of your portfolio to leverage your cash/conservative accounts. I ran across this the other day:

http://video.msn.com/video.aspx/?mkt=en-us&vid=ff0a6fc4-17ac-4de4-89bb-a1e2d61b7c6c&wa=wsignin1.0

Thankfully, Kiplinger's has a lot of us on record making this same exact recommendation years ago. Back then, there were a lot of negative responses from those who follow the masses and do not look at cash value insurance as an objective alternative.

it struck me as both obvious and expected that the financial reporter starts from the assumption that "term is good" and "whole life is bad". and then has the audacity to ask the guests (neither of whom are in the insurance business) if they are playing to fears of the present market.

i agree that professionals have been pointing this stuff out over the last few years and doing so competently (esp on kips). my whole life is paying over 6% this year and is my most conservative portion of my portfolio. oh, and i havent lost a penny in it either. that gives me some additional solace in this market.

It was interesting to see that the host automatically assumed that it was a pitch and jokingly mentioned "playing to fears" and "selling", even when it clearly wasn't the case.

The guests are from impartial FEE-ONLY wealth management firms, not the insurance industry. They could care less about "selling" you insurance, as their core objective is finding the best place for your assets.

The bottom line is that the permanent insurance asset class is the highest paying conservative place to have your money in the current market. That is the only reason why wealth managers are mentioning it. Oddly, they never even mentioned the death benefit as an advantage.