A client of mine asked me an interesting question over the weekend about the status of whole life insurance cash value as an asset. His question was whether it was protected from lawsuit judgments?
This question came because he had been approached by an agency that purported to represent large numbers of doctors from India. They highly recommended that all doctors have large amounts of whole life insurance as a way to protect at least some of their assets from possible malpractice suits. My initial take on this, that the cash value was a safe haven, was that it sounded like a good sales pitch but that with the huge variance in state laws it was doubtful that one size would fit all.
Let me tell you what really smells right up front on this. If the whole life insurance cash value is what is shielded from lawsuit garnishing, then to be significant in planning there would have to be large amounts of cash value stuffed away in the policy. Unless you can strategically plan on not being sued for 20 years or so, the only way to have significant cash value accumulation is to over fund the policy. In layman’s terms, pay way too much for your policy so the excess goes into the cash value.
I have feelers out to several advanced planning departments and independent attorneys on this question and hope to be able to pass on more than just my opinion this week. What I have found so far is that if this situation were in Colorado, which is a pretty typical state from an asset protection standpoint (according to Russ Lombardy with Clear Wind Law), up to $50,000 in whole life insurance cash value would be sheltered from attachment.
Bottom line. There’s probably only one thing that would make a whole life prone life insurance agent salivate more than just an average over priced sale. That would be talking someone into over funding a policy, thus driving the policy cost, and more importantly the commission on the sale, through the roof. More on this soon.
My 20 years of experience give me the knowledge and leverage to find reasonably-priced life insurance for people who have been declined or are paying more than they need to.
I keep reading in every single article against whole life insurance that the problem is high commisions for the agent. I can bet to you that most agents that believe in this type of life insurance will be willing to give up a good part of the commision.
Why do I say that? because we believe it is good for the consumer.
Term life is a better business for the Insurance companies since according to university studies 99.3 % of term life insurance contracts expire without paying a single claim.
Find and read “Becoming your own Banker” by Nelson Nash and then get back to me and I will help you set up your own personal banking system.
Mr Herrera,
OK, all of you whole life loving agents out there that believe in your product so much that you are willing to give up part of your commissions, raise your hands! Nothing, huh? Well, since you’re absolutely wrong on that, let’s address your other assertions.
I’ve never said that high commissions are the problem with whole life insurance. What I have said is that agents love whole life insurance because of the high commissions and renewals it pays. They certainly don’t sell it because it makes sense for the consumer.
By the way, I read the book and think it’s a crock of crap also. The problem is that you and whole life agents seem to think the American public doesn’t have anything in their budget but life insurance. To truly adequately insure their family(the purpose of life insurance) and to over fund their life insurance to become their own banker is a budget buster.
You are absolutely right that most term life insurance doesn’t pay a death benefit. Part of that is because people get tired of paying for insurance and it lapses. That percentage is amazingly close to the same lapse reason with whole life and universal life. The other reason term life doesn’t pay is that people simply out live the need for the insurance. With whole life you have people assume the need for the life insurance will never go away. That is stupid! Sorry, got emotional. Changed my mind again. That is patently stupid.
Let me be clear. Commission is not the issue. The product stinks. It is the wrong choice for life insurance. It is the wrong choice for an investment (retirement) plan and it is absolutely stupid to consider it as a way to become your own banker.
Hello Hinerman,
I noticed your post regarding both commission and the validity of properly structured whole life. Let me be clear, I am an agent and owner of my own planning firm before I respond.
In response to your post, the reason that many people don’t get ahead in their lives is due to the mechanism of savings that they use – namely dollar cost averaging. Tax deferred accounts and the nature of dollar cost averaging simply doesn’t make sense, and actually has the effect of reducing a person’s return over time. You will actually pay higher amounts of deferred taxes (even at today’s low rates) than the value that tax deferral could ever earn you over time.
If whole life is properly structured, it can be the foundation for tax free access of funds and liquidity, and can provide meaningful resources in the event of a key breadwinner dying prior to the other spouse. In addition, the “banking” concept is an excellent method to control the financial wealth loss that we all experience over time.
Now a note on commissions…this issue comes up often and needs to be discussed. Keep in mind that agents are only paid large commissions on the BASE of the policies, and not the riders that make banking possible. PUA (or paid up additions) riders are added to overfund the policy and only pay the agent about .5% on average. Renewals are reduced drastically after the first year, and only pay out for 5-6 years in any meaningful way. This reality is in stark contrast to the one you presented in your post.
Just thought I would interject some facts up here.
Thanks.
Hello Matthew,
Thanks for the input. Always two sides to a story. Everyone seems to think that commission is my big miff with whole life insurance. Truth is I have a whole list of them, commission just happens to be what drives people to sell a product that contains the rest of the list. “Only paid large commissions on the base policy”, which on average are 5-10 times higher than a comparable term policy. “Only paid meaningful renewals for 5-6 years” compared to term insurance that doesn’t pay renewals. Companies pay inordinately higher amounts of commission to get and keep these cash cow whole life policies on their books.
You can’t craft a financial plan around commissions…that is like buying a car for the cupholders. A lifetime of paying 1% on your invested assets will cost you far more than paying the commissions on a whole life plan.
More importantly, a whole life plan is an excellent distribution vehicle! As long as distributions are done properly, you will never pay a DIME of taxes on money that comes out of a whole life plan. In addition, it beats the worst investment you could make – home equity.
The key is to utilize a PUA rider on the policy, if you don’t do that it doesn’t make sense. I get tired of websites that continually bash whole life as an asset class – clearly they are not very sophisticated planners.
Wealthy families and banks put BILLIONS of dollars into these plans for a reason. They are the b-e-s-t places for long term cash accumulation with access, liquidity, safety, and tax free return.
And for the record, why would you buy a term policy when less than 1.5% of them pay out? These are the typical strategies espoused by Suze and Dave – they may sell books but they don’t know much more than an investment rep with a few years experience. They all sell the same tired advice.
“I get tired of websites that continually bash whole life as an asset class – clearly they are not very sophisticated planners.”
Look, just so we’re clear, I was helping people with financial planning and insurance when Dave and Suze were kids. And if you really are tired of websites that bash whole life, quit following mine because it isn’t likely to change.
The percentage of term policies that pay a death benefit is low. It should be low. Outliving the need for your insurance should be a goal, not a negative.
Wealthy families and banks aren’t average hard working people that need to watch where every dollar goes! If they want to puff up their importance or their balance sheet with whole life, by all means they should do it. Take those two classes out of the equation and let’s talk about the lapse ratio on over sold, over priced whole life.
The lapse ratio on whole life has nothing to do with the quality of the product. It has everything to do with the planners that sell them, and the discipline of the client.
I’m guessing that you advise your clients that tax deferral is a great way to save? Even when we have record low tax rates poised to rise?
You ALWAYS need insurance – the reason why? Because both people don’t die at the same time. Think about it. If you have one person die, and they both have been living off tax deferred accounts for 20 odd years or more, how is one person supposed to make it the remainder of their years on a depleted account? Yes you overpay for the insurance when you are young, but you massively underpay for it as you age. And so few people have enough home equity to make it the remainder of their time…especially now with the housing market down.
Traditional accounts (other than Roths) simply cost people more money at a time when they least can afford it. And you can’t put much money in them really – so not all that great from a savings standpoint.
And for the record I don’t “follow” you…I just happened to come across your site and saw your comments. Changing times require changing strategies.
You poor brainwashed whole lifeian! If it were true, and it’s not, that people “ALWAYS” need life insurance, they should buy universal life with a no lapse guarantee and invest the difference in Roth IRA’s. But they don’t always need it. You have yourself convinced that most, if not all people, will be homeless without whole life or at least have damaged lifestyles and that simply isn’t the case…..and you know it.
“The lapse ratio on whole life has nothing to do with the quality of the product. It has everything to do with the planners that sell them, and the discipline of the client.” There is no quality to the product. It’s all about an overpriced, recklessly sold, unnecessary product sold by “planners” who are more interested in their income than their client’s future.
It’s obvious you and I will never come to an agreement on this, but feel free to keep throwing out what you see as all of the attributes….just makes my case stronger.
Believe me, I enjoy the give and take here….
Universal life is not a good product, because you can’t add a quality PUA rider to the policy. To be clear, I am advocating whole life with a PUA rider for a nice injection of cash and liquidity. You are talking about universal life in one breath, and then the “costly” whole life plans in the next breath? Shame on you, you should know that universal life (and variable for that matter) is total crap and should NEVER be sold to anyone. Besides, if you want to limit the premiums simply offer them a limited pay whole life! Much better.
By selling a PUA rider, I am putting the client’s interest FIRST because it reduces the cost of the policy. How can you make the case that it doesn’t? An example…
$10,000 total premium, $3500 base, $6500 PUA. (Or whatever combination would prevent a MEC from occurring.) I as the agent only get paid on the base, as opposed to the whole premium like traditionally. Plus I am increasing the client’s protection and tax free access at retirement. That is very valuable.
now….please counter me so that I can drop some math on you next time.
Send me an illustration for a preferred male age 48 for $1,000,000. I will post the illustration untouched in a blog and then I’ll drop some math on you.
From Veronica. I inadvertently deleted her comment. “I’m not trying to fuel the fire, but I was quite interested in reading into the rest of this! Two schools of thought…I’m just curious… so, where is the math you two?! I just wonder if there is ever an agreement somewhere down the road. . .”
My answer. Matthew has been spouting numbers for a few weeks now and has not yet responded to my request for an actual life insurance company illustration. When, or if he does that the debate will continue. I’m not interested in his spin on whole life. If he can back it up with facts, the illustration, then we’ll continue. My math will come in response to his illustration. Not trying to end the conversation, just make is factual.
If he’s for real and really believes all that he’s saying, he’ll jump all over the chance to prove me wrong.
Hi Hinerman,
It seemed that just because Jorge and Matthew were giving their opinions on whole life vs term you seem to want to put them down. Now Jorge looked like all he was doing was sales pitching(so that’s a little more understandable that you bash some), but Matthew at least seemed to bring up some valid points and he didn’t seem to be trying to bash you in any way. Why would you resort to name calling? “You poor brainwashed whole lifeian!” Hopefully you’re more professional when doing your planning than when giving opinions on your blog.
Anyway, I do hope Matthew does give you an illustration as this would be very interesting to hear both sides. You do seem to be very knowledgeable on your side of the arguement does Matthew for his. And if you’re both willing to show the numbers that would help everyone reading this blog more of an educated decision. Are you able to email him to have him send on of those projections?
Seems like there’s no real clear cut answer to term vs. whole life. I guess it’s almost like choosing a political party. I’m on the fence, but there really may be no true right or wrong.
I disagree that there isn’t a clear answer. If the water was murky at all, my years of inviting whole life agents to provide their best illustration would not go unanswered.
The clear answer is buy term insurance if you need is not permanent. If your need is permanent buy universal life with an external no lapse guarantee.
Matthew’s arguments are all sales pitch and no substance. If he can’t show it in an illustration, it’s hype. I have no tolerance for agents who refuse to back up what they claim by providing the industry standard for factual information, an illustration.
Hi,
Thanks for the reply. I guess I’ve heard some of what the infinite banking people are talking about and it seems to make sense, and I saw in an earlier post that you said you read the book. I’m guessing you wouldn’t have many pros about it, so can you tell me what would be the cons about it? I know commissions are higher on whole life policies but it seems like after so many years it would be worth the cost anyway. Your input on it would be appreciated. Thanks!
The only way infinite banking will do what they claim is if the policy is grossly over funded, funded way past the point needed to maintain life insurance. My stance is that if you are going to grossly over fund something, why not take the over funded part and put it to work building wealth in a vehicle that, if touched, doesn’t wreck your life insurance.
What other vehicle would you suggest that would give similar or better results? Seems like their(infinite banking people) reason is lower taxes or lower cost basis if invested, and a “free” death benefit that can be paid for fully in several years. Please correct me if that’s not accurate, that’s just what I’m gathering from what some of their agents are saying. Again your input would be appreciated!
I also noticed you mentioned a UL with a no lapse rider. Is there a certain amount of time you have to have the policy before the no lapse rider kicks in? Say I just don’t want to pay for it anymore or don’t have the money can I still keep the death benefit? Thanks
Alex,
Infinite banking is accomplished by overfunding. That’s the only way to pay up insurance and build substantial cash value quickly. Because I have yet to find an agent willing to share an illustration of a whole life policy “built” for infinite banking, it’s hard to say what vehicle of vehicles I would recommend. It’s a little like being asked to solve a math problem without knowing any of the values.
Remember, there are three things you are buying into when you buy whole life and especially when you overfund that purchase. First, you are buying into the notion that your life insurance is a permanent need. Second, you are signing off on the fact that this concept that no one wants to illustrate is worthy of very large sums of your money and third, you are saying that you don’t need anything other than insurance for at least 7 years since the overfunding will almost certainly create a MEC, modified endowment contract, that will cause a taxable event if you attempt to use your bank in the first 7 years.
I would recommend that you read the book titled:
” The Pirates of Manhattan” it will shed light on some of the myths that are out there, from the cookie cutter advisors, you hear and see on T.V.
I would also like to know your opinion on the clients that were told to buy Term and invest the difference and then planned on retiring in 2009. OOPS! Their plan blew up!! Didn’t it! The stock market has costs and risks associated with it and tax consequences, as well. Having a Whole Life policy, has contractual guarantees and tax free benefits. There are only three types of money! Taxable, Tax Deferred and Tax Free. I prefer the latter!