(originally posted here∞)

^^ That fact that people are willing to spam our forum to sell Whole Life should tell you something. It's a financial product that's essentially pitched at everyone and useful for none. The costs are horrendous...even a variable annuity (shudder) would be a better investment.

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One could go on & on, but there's a succinct summary here∞ (with more links at the bottom).

What do you mean "plus interest?" I think you've been confused by the #1 thing insurance salesmen don't tell people: when you die, you don't get the cash value, only the face value.

Even then, you're way way better off investing in ordinary tax-managed funds, or even a low-cost annuity (ugh). You can only access the cash value by canceling the policy, and doing so is not exactly cheating Uncle Sam: CV minus total premiums is taxed as ordinary income.

The only time I can justify whole life insurance is for convenience @ death: e.g. buying a small (<$10k) policy around middle age that you entrust to pay for burial expenses & estate disbursement.

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Why would someone need more life insurance during retirement? There's no income stream to protect -- on the contrary, if they die earlier than expected, then they can pass on the remains of their retirement portfolio. I can think of some reasons, but it can't be a common phenomenon.

Furthermore, given the expense, why would you go with the more expensive option? The more likely you are to die, the more it will cost. If you need millions of dollars you don't currently have, no financial instrument will provide a free lunch. Piling on the expense structure of whole life can only make things worse.

Eww, don't even think of bringing up VUL.

- The company has the option to terminate the policy before you die (quite common when you get old). Think about that.

- It's included in your gross estate (removing the 1 possible advantage of whole life).

- Even if the underlying company's investments have a history of decent performance (very rare -- all the ones I've seen lagged the market by several percent a year BEFORE accounting for their high fees), you have to commit to 20+ years to have a prayer of recouping the investment. During that time, even if you found a policy with an acceptable cost, you have no guarantee they won't change their fee structure after you're locked in. If you decide to leave before 20+ years elapse, not only have you given up your only chance of decent returns, but the surrender load will rape you.

Whole life may be slimy, but VUL is downright evil.

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It doesn't matter where you live or how much you have left on your mortgage. If you're retired, it's impossible to augment your cash flow through insurance (barring fraud or suicide or similar).

For simplicity, let's model your entire retirement portfolio as an immediate annuity whose PV = value of your investments + the PV of any pensions and/or social security you qualify for. Either that income stream will cover your housing expenses for the duration of the annuity or it won't, period. You can use different forms of insurance to shuffle the money between present and future (probabilistic) benefits, but nothing that couldn't be done with ordinary investments and/or annuities (assuming such effects were desireable, which is debateable). Meanwhile, every expense you incur comes straight out of your net worth -- and when you're retired, net worth is all you've got left.

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Run the numbers -- the conclusion will be painfully obvious. Or read the links.

You can also look at it from an actuarial POV if that helps. The decision whether to buy term or whole life is not binary: you have the option to buy either in the future. Thus you can apply real options analysis to estimate the Present Value of today's choice. Picking any distribution of death dates you like, it's trivial to show that the net current benefit is always higher with term.

The "secret" (well, not so secret anymore) is that the easiest investments are also the most resposible.

If you really want to spend the money on insurance, buy something useful like disability (if you're young) or long-term care (if you're middle-age/old).

It's only useful for the subset of uber rich who enjoy the feeling they get from a salesman who convinces them how priviledged they are to fund his retirement. (Telling rich people that their needs are secret & special is a long-entrenched tactic. At least when hedge fund salesmen make this pitch, they provide a small chance of a lucky payoff as they laugh to the bank. The only way to get lucky with insurance is to die young, which is no fun at all.)

For someone of modest means looking to cover death expenses, you could probably do better just buying savings bonds -- the overhead is that high.

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Run the numbers -- the conclusion will be painfully obvious. Or read the links.

You can also look at it from an actuarial POV if that helps. The decision whether to buy term or whole life is not binary: you have the option to buy either in the future. Thus you can apply real options analysis to estimate the Present Value of today's choice. Picking any distribution of death dates you like, it's trivial to show that the net current benefit is always higher with term.

The "secret" (well, not so secret anymore) is that the easiest investments are also the most resposible.

If you really want to spend the money on insurance, buy something useful like disability (if you're young) or long-term care (if you're middle-age/old).

It's only useful for the subset of uber rich who enjoy the feeling they get from a salesman who convinces them how priviledged they are to fund his retirement. (Telling rich people that their needs are secret & special is a long-entrenched tactic. At least when hedge fund salesmen make this pitch, they provide a small chance of a lucky payoff as they laugh to the bank. The only way to get lucky with insurance is to die young, which is no fun at all.)

For someone of modest means looking to cover death expenses, you could probably do better just buying savings bonds -- the overhead is that high.

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(continued )

Yes they are. I might rant about WL / UL every now & then, but at least they are legitimate insurance products; VULs I call "anti-insurance." The whole point of paying for insurance is to reduce risk. With VULs you pay (extravagantly, I might add) for the privilege of shifting the insurance company's risk back onto yourself.

VULs are extraordinarily complex -- many/most of the salesmen pushing them don't understand them fully. So until we have a specific plan's annual prospectus to examine, please don't trivialize the matter.

Why is setting up automatic debits to a retirement account more difficult than setting up automatic debits to an insurance plan? Even if the latter is somehow more convenient, is it worth the thousands you'll pay in fees? (much less the tens of thousands in opportunity cost)

Here are a couple links to threads where licensed insurance agents talk about VULs:
Samlee∞
Meph∞
Vince∞

mjmcinto: here's a decent life insurance intro page∞ that should help you start determining your insurance needs (if any).

As for AEFA, want to see where they make their money? Forget their marketing literature, let's see what they tell Wall Street:

quarterly report∞

They are an insurance company. They do investments as well, but look how they plan to derive revenue from them -- wrap fees! If that doesn't put the fear of Jebus in you...

If you really really want a cash-value life insurance policy, stick with regular universal life. There are a few companies that offer no-load plans with low-cost underlying investments. Ameritas offers Vanguard; ING gives you access to their institutional-class fund shares, which aren't VG but are passable. You'll still pay ~1%/yr management expenses on top of the subaccount fees, plus some state tax -- figure roughly 20yrs of tax deferral to break even -- but at least you won't be hit with a 15% surrender fee + 10% tax penalty if you decide to bail out for saner investments before then, like you would with some of the Amex plans I've seen. And of course, like all permanent policies, if you're unlucky enough to die the insurance company keeps the cash value. Good luck.

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Ok then, "simplify." Point is, neither of us have yet scratched the surface of the countless variations that lie hidden in VUL contracts. Every company has different technicalities, exceptions, hidden fees, etc. which add up to a product that's far more complex than the one pitched by marketing, and usually far more insidious.

They offer both: VULs where you can invest in equity instruments, and fixed-rate policies that invest in debt. As you can probably tell, I wouldn't recommend the former to anyone. However, knowing that the underlying fund families are inexpensive is helpful even when shopping for fixed whole/universal life because you can be more certain that the return on the cash portion is competitive with the alternatives in the "real" market. Of course, you'd still want to see the complete prospectus and run the numbers yourself -- it's likely you'd be better off just buying tax-deferred savings bonds. (In a more typical plan, where your first year's premiums are paying for sales commissions instead of accumulating, even CDs might be an improvement).

RIGHT. The only way around it (i.e., to end up with your "first way") is to add a rider to the plan. There are many other possible riders that manipulate the cash value, e.g. the surviving-spouse purchase option. As if permanent insurance weren't expensive enough, that cash-value-on-death rider will cost you very dearly.

No rider changes the way permanent insurance fundamentally works: the cash value is money accumulated by excess premiums (plus investment gains, less fees & commissions) during the early years. So long as you hold the policy, it belongs to the insurance company, eventually allowing them to subsidize your premiums during the later years. I say "belongs" not only in the sense that you must cancel the policy in order to see that cash, but also in the sense that you have no control over the terms & conditions. (Again, read your contract.) It's not uncommon for companies to increase their fee schedule partway through the decades-long process. It's even more common for them to shift investment strategies. With fixed universal, this is annoying because the underlying inefficiencies are likely to raise your future premiums. With your typical VUL, it's downright disastrous.

The more important point hinges on the way these products are marketed. It's common to list steady premiums (in the case of whole life) as selling point while also talking up the cash value as a retirement vehicle. You can't have both!

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