Seeking Constructive Advice on Whole Life for High Income Ea

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ratesguy
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Seeking Constructive Advice on Whole Life for High Income Ea

Post by ratesguy »

I've seen lots of threads on whole life. But they just "flame" people and say "run" conflict, buy term, invest the difference. So if that is all you want to say, it's not worth repeating. Here are the facts:

Age 38
1M per year income or a bit more, expected to rise, fairly stable for the industry
3 kids, one spouse
I have maxed our tax-advantaged space. I even do the mega back door IRA - contribute 52k to 401k and covert about 25k to Roth per year (52 minus 17500 pretax minus 10k profit share)

Also do Back door Roth for my wife and I
Obviously 401k maxed
529s funded to gift tax max including 5 year lump sum (eg 140k each, after 5 years potentially another 140k - could use for nephew or grand kids down the line if it gets too big

Taxable in index ETFs

Now how to get more tax-deferred space for more fixed income as taxable grows and I want to retain wealth rather than risk too much in stocks

So considering adding to my term policies (about 3.5M) another 1M in 20y term (youngest out of school)

Eventually let term run down as wealth builds

So confirming a 1M whole life policy that would be max overfunded (like 40k per year)... With Northwestern. Floored rate of return of 4pct, recent history of more but skeptical that last in this rate environment.

Essentially acts as a Roth IRA as it grows tax deferred and you can take money out for retirement tax free - as a loan from the policy but you pay interest back into the policy. Basically to beat it over a long horizon of 25-30y I would need to get 5.5 on mini's. That is tough. And the ones that come close like most minus have tons if call risk.

Thoughts?
chead
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Re: Seeking Constructive Advice on Whole Life for High Incom

Post by chead »

One note of caution:

You need to be very careful about the rates they quote you (e.g. 4cpt floor). That number is usually gross and not net. The way the net annual returns are calculated is quite complicated and not transparent at all. They don't publish the formula anywhere and your broker probably doesn't really know how the nitty-gritty of it works.

Run the irr yourself on the illustration that they provided you to see what rate your actually getting. Your projected net return is not constant over the life of the policy.
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HardKnocker
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Re: Seeking Constructive Advice on Whole Life for High Incom

Post by HardKnocker »

Whole life is a crappy investment.

Just pile your money in a tax-efficient index fund.

How about tax-free bonds? With your income they make sense.
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dhodson
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Re: Seeking Constructive Advice on Whole Life for High Incom

Post by dhodson »

You don't actually pay interest back into the policy. It goes to the insurance company general funds.

Go to whitecoatinvestor.com and review his article on whole life as a Roth.

As mentioned, you should look at the real IRR both guaranteed and illustrated.
Whitecoatinvestor has an article showing that as well if you want.
Grt2bOutdoors
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Re: Seeking Constructive Advice on Whole Life for High Incom

Post by Grt2bOutdoors »

Buying a low cost variable annuity is preferable than buying a life insurance whole life policy. The fees will eat you alive with whole life.
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Elbowman
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Re: Seeking Constructive Advice on Whole Life for High Incom

Post by Elbowman »

Hah, its been a while since I've seen one of these posts.

"I've decided to shoot myself in the foot. Now I know there are a lot of foot shooting haters on this forum, and I've considered your arguments so you don't need to repeat them. As for the rest of you, what caliber and angle would you suggest? Toes or arch?"

But on this forum, there really is no "rest of you". The fees overwhelm the tax advantages. When it comes to Whole Life as an investment, there's really no debate to be had between informed, uninterested people.
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Taylor Larimore
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Re: Seeking Constructive Advice on Whole Life for High Incom

Post by Taylor Larimore »

Now how to get more tax-deferred space for more fixed income as taxable grows and I want to retain wealth rather than risk too much in stocks.
ratesguy:

Usually the best way to get tax-free space for more fixed income when there is no more space in tax-advantaged accounts is to use tax-exempt bond funds in the taxable account.

Boglehead Allan Roth, CPA and CFP, wrote this article yesterday:

Why Insurance And Investing Often Don't Mix

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
Buffetologist
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Re: Seeking Constructive Advice on Whole Life for High Incom

Post by Buffetologist »

I've had a similar thread running in parallel seeking similar answers.

I don't have them yet, but I just wanted to know that I support you in your search for answers.
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Re: Seeking Constructive Advice on Whole Life for High Incom

Post by Buffetologist »

dhodson wrote: You don't actually pay interest back into the policy. It goes to the insurance company general funds.
Dhodson, what specifically does this statement from my TIAA-CREF illustration actually mean in the context of your last statement?

How much interest is this costing me?

"The rate charged on policy loans is guaranteed to be no more than 5.00%. The rate credited on
policy value used as loan collateral is guaranteed to be no less than 4.35%. We currently credit
4.35% in the first 10 policy years and 4.80% thereafter."
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HomerJ
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Re: Seeking Constructive Advice on Whole Life for High Incom

Post by HomerJ »

chead wrote:One note of caution:

You need to be very careful about the rates they quote you (e.g. 4cpt floor). That number is usually gross and not net. The way the net annual returns are calculated is quite complicated and not transparent at all. They don't publish the formula anywhere and your broker probably doesn't really know how the nitty-gritty of it works.

Run the irr yourself on the illustration that they provided you to see what rate your actually getting. Your projected net return is not constant over the life of the policy.
This. That 4% looks good to you, but you're not really going to get 4% a year... You'll be lucky if the cash value of policy equals the premiums you've put in by year 10 (i.e. zero return).
letsgobobby
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Re: Seeking Constructive Advice on Whole Life for High Incom

Post by letsgobobby »

I have thoughts but per your parameters nothing I can say. Good luck though.
freddie
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Re: Seeking Constructive Advice on Whole Life for High Incom

Post by freddie »

If your starting off in bonds, is there any reason to buy an annuity versus muni bonds? I have to imagine the muni bond return is going to be much higher (i.e. you will be paying 44% when you take money out of the annuity) if you actually have to spend the money.


I would love to see an example of a whole life policy returning 5.5% for 25-30 years. I would have to think about investing in one of those:)

Grt2bOutdoors wrote:Buying a low cost variable annuity is preferable than buying a life insurance whole life policy. The fees will eat you alive with whole life.
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White Coat Investor
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Re: Seeking Constructive Advice on Whole Life for High Incom

Post by White Coat Investor »

I've written extensively on this subject and I'm not sure if you've seen any of that. Here are a few links:

http://whitecoatinvestor.com/debunking- ... insurance/ (4 part series)

http://whitecoatinvestor.com/8-reasons- ... -roth-ira/

http://whitecoatinvestor.com/whole-life ... set-class/

http://whitecoatinvestor.com/a-whole-li ... qa-series/

http://whitecoatinvestor.com/thoughts-o ... e-returns/

I hope some of that helps. With a $1 Million income, your need for a high return is not as much as for those of us with less income, so you may be willing to look past that negative aspect of whole life and may appreciate some of the other aspects (asset protection, some tax benefits, some estate planning benefits) enough to still buy it. I wouldn't, even if I had $1 Million income, but you may still want it.

The 4% return isn't guaranteed. The guarantee is probably about 2% with projected returns around 4-5% (this is over a 3-5 decade period, shorter periods have worse, sometimes much worse returns.) I would expect returns of 3-4% over your lifetime, perhaps slightly besting inflation.
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HomerJ
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Re: Seeking Constructive Advice on Whole Life for High Incom

Post by HomerJ »

freddie wrote:I would love to see an example of a whole life policy returning 5.5% for 25-30 years. I would have to think about investing in one of those:)
You basically get 2% less than what bonds return... That 2% is your fees... Over the last 30 years whole life has returned in the 5% range, and bonds returned in the 7% range. Going forward, bonds are not likely to return 7% for a while, and that means whole life isn't going to return much either...

Might as well just invest directly in the bonds yourself, and save yourself 2% a year. Even if you didn't use munis (tax-free), you'd make more money paying taxes on normal bonds... Even 50% taxes on 3% dividends from Total Bond Market Index fund is only a 1.5% drag on your investments.

Why pay 2% a year to avoid 1.5% in taxes?
placeholder
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Re: Seeking Constructive Advice on Whole Life for High Incom

Post by placeholder »

I'd like to see one example of someone being flamed for asking about whole life.
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Langkawi
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Re: Seeking Constructive Advice on Whole Life for High Incom

Post by Langkawi »

placeholder wrote:I'd like to see one example of someone being flamed for asking about whole life.
Most of those threads have been deleted as most whole life threads are started by insurance salesmen.
http://www.bogleheads.org/forum/viewtopic.php?t=57154

Perhaps the OP is an example of those salesman refining their technique.
forkhorn
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Re: Seeking Constructive Advice on Whole Life for High Incom

Post by forkhorn »

Elbowman wrote:
"I've decided to shoot myself in the foot. Now I know there are a lot of foot shooting haters on this forum, and I've considered your arguments so you don't need to repeat them. As for the rest of you, what caliber and angle would you suggest? Toes or arch?"
:D
Very funny. I will have to remember this and recycle it elsewhere (claiming it as my own, of course).
EnjoyIt
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Re: Seeking Constructive Advice on Whole Life for High Incom

Post by EnjoyIt »

HomerJ wrote:
chead wrote:One note of caution:

You need to be very careful about the rates they quote you (e.g. 4cpt floor). That number is usually gross and not net. The way the net annual returns are calculated is quite complicated and not transparent at all. They don't publish the formula anywhere and your broker probably doesn't really know how the nitty-gritty of it works.

Run the irr yourself on the illustration that they provided you to see what rate your actually getting. Your projected net return is not constant over the life of the policy.
This. That 4% looks good to you, but you're not really going to get 4% a year... You'll be lucky if the cash value of policy equals the premiums you've put in by year 10 (i.e. zero return).
^This

I was almost duped into one of these plans a while back. But before I invested so much of my money I needed to understand the nitty gritty of it. After reading tons of information I still did not feel fully comfortable so I created an excel spreadsheet month by month doing contributions and returns. It turns out you spend so much money on fees that it really does take anywhere between 7-10 years just to break even. 7-10 years is way too much time before I see a single return on that investment just to protect a little money from taxes. I would rather the government have it than the crooks who sold it to me. You are much better off to by term life and just put your money in a taxable account.

good luck
A time to EVALUATE your jitters: | viewtopic.php?p=1139732#p1139732
Topic Author
ratesguy
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Re: Seeking Constructive Advice on Whole Life for High Incom

Post by ratesguy »

Thanks to everybody. No I'm really not an insurance salesman.

Lots of great stuff. It is being presented as a four percent floor. I have concerns on how you do that in today's market.

The IRR he claims, over a long horizon, like to 65 I think so 27 years equates to earning over 5 pct in munis and 7 pct in corporates

But, I don't like the inherent conflict of interest. But even if we posit it's a "good" product somebody would be selling it. I didn't ask for it I asked to add term but of course I keep getting the sell. I really don't think this guy is shady but his incentives are obvious. I'm sure he is overselling the benefits. There clearly are benefits but there are costs that as pointed out are better hidden.

I wouldn't even think about if not for an older (by 10 years or so) former co-worker who truly is brilliant not been such a believer. At that point I thought maybe if I was close to your income etc it could make sense.

But he was and I'm sure still is very busy. So am I. So in an odd way we may be easy targets.

I intended to, an am now convinced, I need to run the IRR myself looking at the fine print and not assuming historical dividends hold or historical returns (hence his inflated IRR numbers I suspect)

What probably is a deal breaker for me is lack of liquidity. I don't want my money tied up where I can't get to it in any reasonable way for a long time.

It also not clear my wife or I put up with the long hours and stress and commute forever. So the income could fall sharply once I reach "my number"
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Re: Seeking Constructive Advice on Whole Life for High Incom

Post by Jack FFR1846 »

Document the minimum % GUARANTEED return.

Document all fees. That will not be easy.

Document the cost of the insurance premium. Compare that to term life. Subtract the 2. The difference can be considered another fee.

Consider surrender costs. They are usually "everything" to about 3 years. They remain substantial for 10 years.

If you put $1MM into a whole life policy, expect that your agent is taking home $100k in 1st 3 year commission. Who would you think is paying that?


I have a whole life policy, but as I've said before, my dad sold it. My dad was the agent and took all the commission. He also paid the premiums for a good 20+ years. Today, I can't get term life for what I pay for the whole life so I may be one of the only people on earth for whom a whole life policy makes sense. If you can find an agent willing to give you his commissions and/or pay the premiums for 20 years, it should be a good buy. If not, then not so much.

A whole life policy is a great way to hide money from FAFSA for college aid calculations. But the loss of gains compared to even bonds doesn't make sense. And adding to that the fact that most aid today is simply a loan, it really doesn't make sense.
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bottlecap
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Re: Seeking Constructive Advice on Whole Life for High Incom

Post by bottlecap »

Brilliant people are just as gullible as regular people, especially in financial matters. I think it's a combination of greed, wanting to believe you know something no one else knows and wanting to feel like you need a special product because of your high income. Gosh, that combination is a financial salesman's dream! I have a friend who is a brilliant entrepreneur and looks at all angles of everything. He still thinks hedge funds are a great investment - I'm sure the salesman played on all these issues. Of course, the next sales meeting the NW guy has is with an average Joe - you're both being sold the same product, but the pitch changes a little bit.

Nothing in your situation suggests that whole life would be better for you - that's why you are getting the hard sell. There are a few circumstances in which it makes sense, but even when it does make sense you will not get a higher return and the return you do get will not be enough to justify any tax-saving benefits. In those instances where it makes sense, it is almost always for business reasons, not financial reasons, and you buy it despite those drawbacks.

You say you are busy and that your time is valuable. This guy is wasting your time. You told him what you want and he wants spend time selling you a product you don't really want. Now you are going to spend a whole bunch of time creating a spreadsheet to prove the guy wrong when common sense will do. Your spreadsheet won't convince the NW guy, however, because he will insist his numbers are right and yours understate the return. But there is no free lunch.

The bottom line is that this is all a waste of time. You make a million bucks a year. You can afford enough to buy term and pay taxes on the gains on the rest you invest and it will not change your lifestyle one iota. You can afford to buy a high-priced whole life policy and it will not affect your lifestyle one iota.

Even if you have found the one-in-a-million whole life policy that will beat a market return after high fees (hint, NW doesn't sell those, if they did, their financial strength rating would not be so high), how much do you think you would beat the market by, .2%? Is that worth all the time and effort you're putting into this given all your concerns? Either buy the pitch or insist on term. Spend the rest of your valuable time working or spending time with your family. You'll get much more out of either alternative.

Good luck,

JT
dhodson
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Re: Seeking Constructive Advice on Whole Life for High Incom

Post by dhodson »

Let me just add to that nice post by saying also don't buy the term from nwm.
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Taylor Larimore
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Insightful Reply.

Post by Taylor Larimore »

JT:

It is easy for investors to lose the forest for the trees.

Thank you for a very insightful Reply.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
Buffetologist
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Re: Seeking Constructive Advice on Whole Life for High Incom

Post by Buffetologist »

ratesguy,

I for one would like to engage you in the discussion of the actual math so we can both learn to understand (and potentially debunk) this without resorting to traditional mantras. Those mantras might be true, but they aren't math.

In my thread
http://www.bogleheads.org/forum/viewtop ... 6&start=50

I cited a potentially instructive article
http://www.nuwireinvestor.com/articles/ ... 58438.aspx

I did my own analysis and I think I see the root of the swindle.

Can you look it over and see if you come to the same conclusion.

Thanks.
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Gattamelata
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Re: Seeking Constructive Advice on Whole Life for High Incom

Post by Gattamelata »

bottlecap wrote:Brilliant people are just as gullible as regular people, especially in financial matters. I think it's a combination of greed, wanting to believe you know something no one else knows and wanting to feel like you need a special product because of your high income. Gosh, that combination is a financial salesman's dream!
(italics added)

It's possible that they're more susceptible to financial salespeople.

I have an acquaintance who nominally offers financial advice, but is compensated almost entirely by the commissions on the elaborate financial instruments he sells. I asked him once if he thought the rise of fee-based financial planning was a threat to his career. He laughed. "Wealthy people don't want fee-based financial planning. They want it to be expensive. You get what you pay for, right? They want geniuses in buildings in the financial district devoting hours of every day to increasing their wealth. They want to get service that people with less money don't get. I built my book of business by pitching to high income earners regardless of their net worth, because intelligent people are easy sells. Just tell them that what you're selling is too confusing for most people. They're too busy doing what they're good at to pay much attention to their money, but they want to feel like they're smarter than other people. Treat them with respect, make them feel smart without overdoing it, and you have a guaranteed customer."

Good thing I'm not very smart :)
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htdrag11
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Re: Seeking Constructive Advice on Whole Life for High Incom

Post by htdrag11 »

Wow! I'm sure he is very successful in understanding his clients' egos.
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