I have two dependents under 3, and a household income of $600k gross. I currently pay $200 a month for a whole life policy with a $100k payout and a long-term care rider. However, compared to other investments like my 529, 401k, HSA, and brokerage accounts where I’m putting about $200k into the markets annually this policy seems small. I also have laddered term life insurance with disability riders, totaling at least 20x more: $2M for 20 years and $1M for 10 years.
What I’m struggling with is understanding the purpose of this whole life policy. The financial planners’ arguments don’t make much sense. It’s not a great investment vehicle, nor is it a particularly good insurance policy. It has some direct cash benefits, but nothing exceptional. For saving, a high-yield savings account seems just as effective. I’m also unlikely to hit the $11M estate tax limit.
The only real advantage I see is the long-term care aspect since getting term life insurance later in life would be harder. It’s not about the money I just don’t get the point of having it.
It’s similar to a Roth IRA invested in bonds, though you’re not eligible for a Roth. You also need to ensure the design is right. You can either maximize the cash value of a whole life (WL) policy, which significantly reduces agent commissions, or opt for more expensive permanent insurance. A properly funded WL plan over 30 years should give you an internal rate of return (IRR) of about 4-5%, with the option to access the money tax-free.
This setup works like a Roth invested in bonds. It might even allow you to reduce or eliminate an emergency fund, since the cash is easily accessible, letting you invest more aggressively in other areas like your brokerage account or 401(k), boosting your overall portfolio return. I only recommend WL for HENRY (High Earners, Not Rich Yet) clients, and only once they’ve taken care of everything else, like you have. Also, WL dividends tend to outperform a high-yield savings account (HYSA) over time.
Annuities aren’t suitable for everyone, as there are often age minimums. It depends on whether the client needs easy access to the funds. Many people appreciate the option of tapping into their policy’s funds when unexpected expenses arise, or even for something like taking a vacation.
The issue with the whole life (WL) policy I have, and others I’ve seen, is that they perform like bonds but worse, offering only a 2-4% return over 30 years.
When you calculate how much you need to invest to get those returns, it’s not tax-advantaged at all.
You’d be better off simply laddering bonds in a brokerage account. Even when factoring in the tax benefits, it’s a poor investment vehicle.
That just means you’ve encountered poorly designed policies, not that the vehicle itself is bad. The returns are tied to the death benefit, so the key is to max-fund the policy, not to invest more. To improve returns, you need to minimize the death benefit to the lowest amount allowed by the IRS. How much you fund is entirely up to you.
Frankly, a Variable Universal Life (VUL) policy is a better option for young HENRYs focused on cash accumulation. You can even get no-load VULs with lower expenses, offering more upside while still providing death benefits and tax advantages. However, many agents aren’t licensed or knowledgeable about these products.
Thanks for the info, that’s interesting. What’s the best way to shop for this? It seems like all the big firms focus more on the insurance aspect rather than the payout. They also push products that benefit them more than the client. I feel like I’m funding someone else’s retirement, not my own!
You mentioned that the OP can’t get a Roth, but I wanted to clarify that, based on their description, it seems very possible. Additionally, considering the OP’s risk tolerance (appears open to taking more risk for potentially higher long-term returns), a backdoor Roth might be a better fit than whole life. However, I’m not sure how long the policy has been in place.
