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In Reply to: whole life posted by joeseph on August 08, 2001 at 14:45:20:
: Why is whole life insurance so bad?
It isn't, but there are "two coins to this side", as it were. It would "shock the Rock" if I didn't jump into this discussion with a touch of Universal Life.
I am 40 years old and have had a whole life insurance policy since I was 25 years old. I purchased the policy from the fee-only planner with whom I still work -- he works with my entire family. The coverage anmount has grown to $277,000 from the original $250,000, and last years cash value was $43,600 ( originally projected to be $32,000 )
The same money into a quality UL would have grown to $289,604 of coverage...and $39,604 ($28,123 guaranteed under a 4% worst scenario) of cash value running at current mortality, expenses and 6.5% interest. The way current UL interest and WL dividends work is one of the basic differences between these types of permanent products.
The dividend was projected to be $1,000 on the original chart the planner gave me -- it really was $1278.
WL dividends are paid with a time lag of two to five years. In other words, your current dividend is based on the bond rate at least several years ago. Rates were higher then. A few years from now, your rate will technically be what bonds pay today. It may be higher, but the difference will come from company surplus (which is simply profits made by overcharging people in the first place). UL, on the other hand, credits favorable experience immediately, every month. Two to five years ago good UL's were paying 7% to 8% plus. There was a time in the last 15 years that UL's were paying 11% to 12% plus. Because of the way illustration software is designed, it's impossible to project anything but the current 6.5%. If it was possible to illustrate current experience back the last 15 years, a good UL would knock the socks off your WL!
My premium is $1800/year. The cash is guaranteed, and I never recieve a 1099 for the increases, which is nice last year my mutual funds tanked and I STILL got a 1099. $1800/year doesnt cost me anything -- I make more than enough money to pay for it.
It's still real money. Instead of paying $1,800, you could have only had to pay $300 for the same thing in "UL land"...and invested the difference in funds for 15 years, paid your captial gains, and been money ahead.
And if I can't work due to a disability -- the company pays the premiums for me. I have friend who is on total disability and can no longer work in his choosen occupation ( trial lawyer -- he lost his voice due to a neurological disorder ), and not only does he get disability income payments from his insurance company ( MassMutual ), but his life insurance premiums are paid, as well by his life insurance company ( Guardian ). He has a $1,000,000.00 policy ( death benefit ) and before his disability ( six years ago ) his premium was $12,000/year -- now he uses loans from his cash value to purchase real estate in his second career as a real estate investor. Seems like a good deal to me.
You're discussing "waiver of premium", which is usually two to three times more expensive than owning your own regular long-term disability income policy. Most agents are trained by the industry to include it as an "automatic" add-on because it means more commission to them, and more profits to the company.
: I like my whole life policy --
You have paid the company $27,000. For that kind of cash, I'd "love" it.
I just borrowed $30,000 from my policy to buy a car. No credit check, no finance company -- and I pay myself back. My planner tells me also even if i borrow my money still earns interest!
Your money earns interest, but less than you have to pay the company to borrow. They own the cash value, and are probably charging you an 8% gross loan rate. I hope your planner also recommend paying it back, because if you don't, the company will get its interest each year from your remaining cash value. This kind of "reverse compounding", if left uncontrolled to where the policy "implodes" for lack of cash value, will make all gain from day one taxable at ordinary income rates the year the policy crashes. I frequently see loaned WL policies with interest charges greater than the premium. If you had a UL, on the other hand, you could simply withdraw up to the sum of your basis (premiums paid) tax-free...then anything beyond basis could be borrowed through a zero-net cost "wash loan", a much more efficient way to access your money you own the cash value in UL, not the company).
Why is this bad?
It's not "bad", just not cost-efficient compared to the alternatives. WL agents generally neglect to cover the "end game" -- How efficiently can you get the money back later? As time goes by, you will discover there isn't one.