Permanent life insurance policies – whole life, variable life, universal life, and all their mutations - are oversold in America. By oversold I mean they take up space in people’s financial plans that could be better allocated to something substantially more useful. Study after study has shown only a small percentage of the population benefits from having a permanent life insurance policy. Yet insurance companies push them on the masses as hard as they can. They make a lot of money from selling these policies and they incentivize their sales force with huge commissions – typically in the range of 50% to 110% of the first year’s premiums.
I have wanted to write about this topic for a long time, but I wasn’t sure how. The issue is complex. The policies are complex. It is a tough concept to write about in a clear, concise manner.
And then there is the insurance industry... The defenders of permanent life insurance are strident, pervasive, well-coached, and relentless. They will come at you like a spider monkey for talking bad about their product. They seem immune to reasonable arguments. As Upton Sinclair once said, “It is difficult to get a man to understand something when his salary depends on him not understanding it.”
I think I finally have an angle, though. A way to present the topic without having to reinvent the wheel. I was recently doing some internet research and I came across a website called “The White Coat Investor”. It is written by a physician who has an extreme interest in personal finance and is on a mission to help other doctors make the best choices when managing their money.
He has written a number of articles on the topic of permanent insurance. I have read most of them and they are excellent. Even more impressive (and educational) than the articles themselves are the comments and responses to his blog posts. Insurance salesman after insurance salesman post comments (sometimes longer than the original article) attempting to refute his assessments. While I would find this highly irritating on my blog, he simply (and unemotionally) exposes their intellectual dis-ingenuousness with an articulate response. I don't impress easily, but this guy impresses me.
If you are considering purchasing permanent life insurance you should spend several hours over on his website reading his articles and the accompanying comments. That probably sounds fantastically boring to most people, but permanent insurance policies are a huge financial commitment for most Americans. Before you enter into that commitment, spend a few hours benefiting from the research and analysis of someone who is not being paid a fat commission to sell you the policy.
I contacted The White Coat Investor and asked for permission to quote his articles on my website. He agreed with some reasonable limitations. There were many fantastic selections to choose from, but I winnowed down my list to a few of my favorite parts of his articles.
If you don’t read anything else, read the 4-part series called “Debunking the Myths of Whole Life Insurance”. These myths are typically created and spread by the people who sell insurance, so if you are considering a permanent insurance policy you are probably being told one or more of these myths to convince you to purchase the policy. Read his articles to get the other side of the story. Here's a quick sample:
Myth # 1 Whole Life Is Great For Pre-Retirement Income Protection
Whole life insurance is not the best way to protect your income, term life insurance is. Before you retire, you can purchase inexpensive term life insurance to take care of your loved ones in the event of your untimely death. A 30 year level premium term life insurance policy with a $1 Million face value bought on a healthy 30 year old runs $680 per year. A similar whole life policy will cost more than 10 times as much, $8-10,000 per year. That is money that cannot be spent on mortgage payments or vacations, nor invested for retirement.
Here is a screen shot of one of the comments and White Coat Investor’s response:
I dream of being so dispassionately smooth. I would probably have told “Tyler” to go take a math class or stop trying to intentionally deceive people.
My absolute favorite thing White Coat Investor has posted about permanent insurance is the “Should You Buy a Permanent Insurance Policy” flow chart at the end of his article called Twelve Questions to Ask Yourself Before Purchasing Whole Life Insurance.
He should sell poster-sized copies of that flow chart. I would buy one, frame it, and hang it in my office. Seriously. People have won the Nobel Prize in Economics for significantly less useful work.
The bottom line I want MY readers to take away is this:
This guy –White Coat Investor - is a doctor, passionate about personal finance and writing advice targeted specifically at other doctors. These are high income professionals with higher salaries, more money, and more financial intricacies than most of us are dealing with. Yet, he is telling them permanent insurance is not a good value.
If it isn’t a good value for the $200K+/year salary crowd, why would it be a good value for you?
The answer is it probably isn’t a good value for you. There are probably better solutions to your financial planning needs. If you want help finding them give me a call.
If you already own a permanent insurance policy don’t feel bad. I once owned a whole life policy for a few months. I was young and naive and got sold on it just like many others before and since. Fortunately, I read some good books and got out of the policy after a comparatively short time. If you own one don’t just dump it, though. Let’s take a look at it and see if we can determine the best way to make a little lemonade from your lemons. If you’ve had it for a while there may be some value in it. We’d want to take advantage of that value to the best of our ability.
Life insurance is necessary. What isn't necessary is conflating the income protection (a.k.a. death benefit) life insurance provides with saving, investing, tax avoidance, self-financing, or any of the dozen other things permanent insurance is purported to do efficiently. Because for nearly all of us we can find more efficient ways to do all of those things. Don't ask me - ask the doctor.