Whole Life Surrender & Pay Down Debt?

[finanplan]

Hello all,

After being "loose" with my finances for six or so years, my wife and I have been on a mission to pay down debt and build our portfolio. In calendar 2012, we paid down a bit less than $40k in debt principal (student loans, small credit debt, car, etc.). We are 30/28 years old, with a 6 month old child. Household income is ~$170k, in a moderately-low cost of living location in the US. Currently maxing my 401k, 10k/year to spouse's, and $10k/year to Roth IRA. Portfolio size high five figures; I have some catching up to do. Emergency fund is 3-6 months living expenses; employment is stable.

Debt situation
$168k mortgage (15 year @ 3.75%; 1 year in)
$30k mortgage (30 year @ 10% ; 7 years in)

Obviously, I'm very motivated to get rid of the second mortgage, which was one of my biggest financial mistakes I've made. Current loan-to-value is likely 98% on a realistic basis.

To cut to the chase, I'm looking at three options.

Option 1: Steady as she goes. Pay down the secondary mortgage at a rate of $2k/month. Mortgage will be paid off in the middle of next year. At this point, redirect the $2k/month cash flow into portfolio.
Option 2: Borrow against whole life policies. I have two old whole life policies through Northwestern Mutual, that were acquired 28 and 18 years ago. Their combined cash value is ~$35k. For ~$20k, I can borrow at 6%, the rest at 8%. Pay down these loans at $2k/month, after which the cash flow will be redirected into portfolio.
Option 3: Surrender the whole life policies, collect the cash value and pay off the second mortgage. Invest the remainder balance (~$5k) by bumping wife's 401k contributions up by $5k in 2013. Since I won't be paying down the primary mortgage at an accelerated rate, this will free up $2k of cash flow monthly, to be added to maxing our tax-advantaged space, then building our taxable portfolio (i.e. I will always be using this $2k/month to build our portfolio). Death benefit of these policies is ~$190k. At present, the dividends are set for premium reduction, and I'm roughly at the break even point (last year I received a dividend check of ~$20.00).

I'm in excellent health and carry $500k of 30 year term, acquired a year ago (preferred plus, or whatever the lowest risk category was). Obviously, I have a young dependent and a spouse that makes about 40% of my salary. I'm not opposed to increasing my term coverage, if it is desired upon surrender of whole life.

Any thoughts? I've asked for an inforce illustration, but I don't see much benefit return-wise versus investing the funds by paying down 10% rate mortgage, and investing the balance and free cash flow into low-cost index funds according to my AA. These policies are "65 life," which means (from what I understand), they are paid up at 65 (35 years from today).

[finanplan]

Forgot to add, but I will be discussing with my agent any tax implications of surrendering. I believe that part of this MAY be taxable (I.e. more cash value than premiums paid), but I'm not sure at this point. I believe the taxable portion, if any, will be small enough so as to not impact my decision.

[dhodson]

just so you know, gains are taxed as income and not the better long term capital gains rate.

what are the face value death benefits of those polices? Normally, once you have a policy this long, its just best to keep them assuming you are planning on leaving some money behind at your eventual death.

im not sure but it seems you intend to be able to pay off a loan from the whole life or the home loan within a year. If that is the case, im not sure its a huge difference how you handle this.

Im not an agent and i think the majority of people have made a mistake by purchasing whole life (a mistake ive also made), but once held this long, typically the return going forward is reasonable and id actually be looking to change dividends to purchase PUAs after i got rid of that 10% loan. At this point, i think its a reasonable bond like return. The upfront costs are sunk and cant be recovered but when i look at how this will be taxed if surrendered, my thought that you could probably use a little more than 500k of insurance, and what your other options are for a fairly safe return, id keep them. Id also look to see if you cant get a better variable loan from NWM. I thought their variable rate was a little lower lately but since im not an agent, im not sure.

[finanplan]

Thanks for the insight regarding tax rates. Income is less desirable, obviously. I don't currently have plans to leave behind wealth, though I can't say how I will feel in many years. At present, I feel it best for one to make their way in life.

Dividends were used for PUAs for many years, until 1.5 years ago. Face value is 50k (about 20k cash value) and 100k (Rest of cash value). For the 50k policy, premium was $380 and dividend was $550ish, as I recall. For the other policy, premium was $440 and dividend was $420 (newer policy).

I've reached out to my agent to determine the delta between premiums and cash value.

[dhodson]

One of the problems with whole life (there are many) is that it rarely makes any sense unless you want to leave some money behind. Many times an agent will try to get you to purchase another insurance product. Keep in mind that probably isnt what you want to do. Some folks would 1035 exchange the CSV into an annuity in order to defer taxes but i personally only think that makes sense when there are big differences between premiums paid and CSV and you are willing to live with the return from an annuity.

you likely want two illustrations. One with the current dividends and one with dividends set to PUA. What you want to do is look at what the CSV is illustrated to be late in retirement. Then take about 90% of that out in loans. The reason i say late in retirement is bc you dont want to pay it back but you also dont want the policy to crash. Your heirs would then get the difference between the loan value and the death benefit value. This way you "maximize" the policy. The return on these darn things is always in the death benefit.

Additionally i should say if you have your term with NWM, that probably isnt the best choice. They really arent competitive for term in my opinion.

[finanplan]

Term isn't with NWM, luckily. Thanks, I'll ask for both of those illustrations.

[SC Hoosier]

You wouldn't do this in reverse and borrow against your home to buy this product, so undo it.

I'd choose option 3.

[Frugal Al]

You wouldn't do this in reverse and borrow against your home to buy this product, so undo it. I'd choose option 3.

If it weren't for the age of the policies, with the largest sales loads already sunk, and the fact that the OP needs the life insurance, your position would be easy to agree with. He's also purchased additional insurance through these policies with paid up additions, which is often one of the best ways to improve the financial performance of a whole life policy. Also, the 10%, 30-year 2nd mortgage can be paid off within a year. I think Hodson provided advice that is spot on. The in-force illustrations will tell the tale.

[finanplan]

Thanks all. I'll post an update after I receive the IF Illustrations. As far as mortgage payoff is concerned, I'm likely on an 17 month timetable for the 10% @ $30k, starting March 2013. In addition, adding $500k of term will cost ~$300/year versus my current policy. I'll likely consider doing this regardless of the scenario selected.

[Watty]

To cut to the chase, I'm looking at three options.

If you have paid off cars that are worth a fair amount then I would add a fourth option. This would be to get car loans at a much lower interest rate and use that money to pay the second mortage off or at least pay it down. PenFed has them as low as 1.49% and your local credit union likely good car loans too so you might easily be able to find one in the 2 to 3% range.


I'm not sure how this compares to your other options but it might be worth looking into.

[finanplan]

To cut to the chase, I'm looking at three options.

If you have paid off cars that are worth a fair amount then I would add a fourth option. This would be to get car loans at a much lower interest rate and use that money to pay the second mortage off or at least pay it down. PenFed has them as low as 1.49% and your local credit union likely good car loans too so you might easily be able to find one in the 2 to 3% range.


I'm not sure how this compares to your other options but it might be worth looking into.

You are right, I'd not considered this. My car, per KBB/etc, is in the neighborhood of $20k at present, and paid off. This is something I'll look into, pending the outcome of IF illustration analysis. Thanks!

[Watty]

One more thought, once you get the second mortage paid off you will be getting close to the 20% equity mark that would allow you to refinance get the best mortage rates. It might worth focusing on that even if it meant cutting back some on some of your retirment savings for a year or two.

[finanplan]

One more thought, once you get the second mortage paid off you will be getting close to the 20% equity mark that would allow you to refinance get the best mortage rates. It might worth focusing on that even if it meant cutting back some on some of your retirment savings for a year or two.

Based on some rough calculations, I don't think the break even period is too attractive, of course based upon closing costs (of which I estimated $5k -- really unsure if this is reasonable or not). 3.75 to 2.9 (15 year terms for both) seems to have a breakeven point of 5ish years, given my assumption regarding closing cost is somewhat accurate.

[mlipps]

Honestly, I just find it insane that with an income that high that you can't afford to pay that off in less than 6 months. I would cut back the 401k, throw all the money towards the loan and pay it off the first half of this year, and then max out your 401k in the second half.

[mephistophles]

Keep those whole life policies. Never buy new whole life as an investment, but policies as old as yours are a good investment in today's market. Up-front sales loads have long since been paid and your total effecitive rate of return (as a living investment) is between 5% and 8%. I recommend not taking loans from the policy as this will greatly reduce your effective rate of return while the loan is outstanding. Recommend you lave the policies along and have dividends purchase paid up additions. I am an insurance agent and this is what I would do. Actually I do it as I have some very old policies myself.

[finanplan]

Keep those whole life policies. Never buy new whole life as an investment, but policies as old as yours are a good investment in today's market. Up-front sales loads have long since been paid and your total effecitive rate of return (as a living investment) is between 5% and 8%. I recommend not taking loans from the policy as this will greatly reduce your effective rate of return while the loan is outstanding. Recommend you lave the policies along and have dividends purchase paid up additions. I am an insurance agent and this is what I would do. Actually I do it as I have some very old policies myself.

With my current dividend usage, I don't see a very good growth rate, based upon my current IFI. In that capacity, the cash value plus insurance over a 20+ year horizon is pretty divergent from a market investment with a 4% real rate of return (base assumption is to take the cash value and invest that amount). Maybe I am thinking of the return wrong, and yes, I haven't received my IFI with premiums going to PUAs.

There is some room in our budget, but I don't want to exceed a 2k month payment on the mortgage. I don't see stopping 401k as a wise option, if I am not able to max in the second half of the year.

[dhodson]

i dont know that you are looking at it all wrong per say...

the benefit in these policies is ALWAYS in the death benefit. First off that is more money than the CSV and second off, if you surrender or lapse then gains are taxed at income rates which cuts further into your return.

while i personally think that an 8% living benefit return is overly optomistic (although nobody knows what the actual return will be until you die and dividends are closely tied to interest rates which is a reason they keep falling with a new policy likely having a death benefit around 5-6% at current dividend rates and CSV much less and older policies doing better than that but still with reducing dividend rates), keep in mind the return on death benefit is income tax free and the loans are income tax free although they do cost interest. Thus the return needs to be put into perspective from a tax angle. It also needs to be in perspective compared to some other lower risk assets you likely would be buying along the way (at least at this point since you have owned it so long. i wouldnt consider this appropriate logic as an initial purchase for whole life).

If you arent willing to leave at least the difference between death benefit and CSV to someone else at your eventual death then id get out now. If you are then i think going forward you get a reasonable situation for the factors i mentioned before. Im no fan of the insurance industry by any means but i dont want you to give up what you have already paid for unless you are sure you know what you want.

[mephistophles]

Here are a few best guesses about the status of your life insurance policies.

You have $190,000 in death benefit which is income tax free to your beneficiary should you die first
Your total cash value is $35,000

Your total annual premiums are $820 and your total annual dividends are about the same amount. You are using dividends
to pay annual premiums which is a wash (suggest excess dividends continue to buy paid-up-additions)

Your annual increase in guaranteed cash value should be in the neighborhood of your total annual premium of about $820 and this
should continue each year the policy remains inforce. In fact, the annual increases in guar cash value may be a little more than
this as time goes on.

Your $820 increase in guar cash value divided by $35000 is about 2.34% tax deferred and this is contractually guaranteed. To compare
to a taxable fixed income investment alternative you would have to adjust the 2.34% upward for the value of the tax deferral, and if
you would also adjust upward for the cost of an alternative term policy of the same amount. These calculations might put your
effective policy living rate of return at 4% or a little higher.

Going foward, my best guess is that your annual dividends may increase each year going forward. Granted dhodsons point that present
day policy dividends are growing slower than in the past (as a reflection of the nature of the underlying bonds the insurance company
invests in.) My best guess is that fixed interest rates will increase in the future and eventually revert to some sort of mean. If that
is the case, then dividends on your policies will increase accordingly. Dividends are the only unknown factor in these calculations, but
my own experience with my own life policies and those of clients reflect what I am saying here.

To summarize, for part of the fixed income part of your investment portfolio, I think that your life insurance policies are a very good fit.
Best regards,
ole meph

[FinancialBalance]

This is my first post on the site. A friend told me to check out the site, your thread caught my eye, and you're the reason I signed up! To be straight and to the point, there's some cash flow issues with some financial myths that are mixed in here. It's a common problem, but hopefully I can help you clear them up so you can make a good decision.

First things first - Discuss the problems: That 30 year mortgage @ 10% that's near 98% LTV is basically financial cancer. You recognize that it's a cash flow drain, and I do too, so let's definitely see about treating it. The treatment is maximizing cash flow, paying down the down, and considering a Refi on the 2nd. The 2nd problem I see are a few issues with Cash Flow... You're maxing your Qualified Plans for the hope of great growth (5%+???), but you've opted to pay down your low-interest, tax deductible 1st mortgage down sooner...all while we have this 10% cancer.... Why? It just seems backwards to me, which makes me believe there's some cash flow confusion.

Second - Let's talk through the treatment... We need to maximize cash flow, so let's count the EXISTING cash flow we have available to treat our 10% 2nd Mortgage cancer...
Your 401(k) - $17,000/year
Her 401(k) - $10,000/year
ROTH IRA - $10,000/year
======================
$37,000/year

Part 2 continued.... Let's come up with some ideas that could create NEW Cash Flow:
-Have you looked at your auto, home, boat policy deductibles? Have you considered being shopped out coverages by an independent? Could be $200-1,000/year in your pocket.
-You mentioned you have a 6 figure portfolio.... Are there any Non-Qualified Investment Earnings that could be redeployed, rather than reinvested in the account? There's no law that says you have to reinvest your earnings.
-The Whole Life insurance you have can create some cash flow for you, but I don't know how much... Let's just say we could come up with a way to access all $35,000 of it on a one-time basis
-You've probably done a budget and you've mentioned your lifestyle is low-key.... But have you tried to stick by it? I find clients can always reduce expenses by 5% with little or no work at all...
-Any existing debt we can refinance to lower rates? I don't know... I'm just asking, because it could create cost savings.
======================
$20,000-$45,000 depending on how you answer it.

That's potentially $77,000 gross cash flows that could easily solve our jam. Even if this number isn't 100% precise, it's important you realize you have NEW and OLD cash flow available at your fingertips

Before I give my solution, let's discuss biases. Everyone has biases.... I have them, you have them, and every other poster has them. Here are my biases, which ultimately shape how I help people make decisions... Stomach your way through them and it'll all lead to something very helpful:
-I don't care how good your money manager is, the 10% pre-deduction interest drag on your annual cash flow from the 2nd mortgage will not be outperformed long-term by your portfolio. It is next to impossible... I'm taking into account commissions, taxes, fees and the fact that volatility affects performance.
-I have a 401(k), but it's important to understand that it's not where my first dollar earned is going... 401(k)'s do not create a tax savings like people think they do - There is a deduction that you get, but it's all paid back in the future (and then some if tax rates increase). The fact is that the tax never goes away because it's deferred into the future. Think of it this way: as the size of the account grows, the tax shadow grows. This might create some stir at first, but at the very least I think we can agree that the "Tax Savings" wouldn't outperform the cost of 10% pretax interest.
-I love Whole Life insurance (and even Term Insurance)... But... they aren't widely understood by the public, agents, or financial advisors. This causes people do drop coverages over time, buy minimum coverage, or buy the most costly products.
-Whole Life is a great asset, but the reason people should own it is not for the Cash Value... The guys over at Northwestern Mutual jaws will drop when they read this, but Death Benefit is more important than Cash Value. You can use Death Benefit while you still live. I think 'mephistophles' has been very helpful in the thread, but current day IRR of premiums paid in relation to the Cash Value are 100% irrelevant at this point in time. Ultimately, Death Benefit is what will drive your rate-of-return (not IRR), because you can use Death Benefit while you're still living (not cash value). So one of my biases is that a growing Permanent Death Benefit is great, because it will be really helpful to have in retirement for asset leverage. The problem I find is that consumers and advisors often lack the tools and methodology on how to calculate returns using the Death Benefit while you still live, which can lead to an ill advised decision with long term effects.
-I love people saving money, and I hate wealth erosion... so don't get discouraged if I tell you to suspend 401(k) contributions.

Now that that's all out there and realizing that I do not have all the facts in your case... Why hasn't anyone considered a Secure Loan??? Your Whole Life insurance is so rock solid safe, backed up by a contract, that it can be used as collateral. Banks dig good capital. There are banks willing to loan you money at 3-4%, which would allow you to avoid the 6-8% loan cost in the policy... If someone tells you to surrender your policies, you're giving up the death benefit FOREVER, which would violating the economic structure of how the Whole Life policies are constructed. Let me translate: Big loss of money for YOUR wealth potential, not some insurance company with billions of dollars. By the way, if you surrender the policy and the cash value exceeds premiums paid, there will be a taxable consequence.

Bottom line: Look at taking out a low interest-rate loan that's secured with a great asset (Whole Life CV) and apply proceeds towards the 2nd mortgage, suspend 401(k) or ROTH contributions (depending on what your outlook on taxes are) to free up cash flow to allow you to slaughter the 2nd mortgage, systematically pay back the secured loan... The result should be reduced interest costs, you get to keep the death benefit on the balance sheet, and you'll net be net positive in cash flow over the course of about a year, and there's other ancillary benefits which I'll only drill down on if I'm asked.

Long post, and I had to edit out some typos.... At this point it doesn't matter what I know and what I can prove, because you're the one having to make the decision... So my question is, reading what I wrote, what are your thoughts?

[Alex Frakt]

Note: We have reviewed the previous post and communicated our policies with FinancialBalance. I want to take this opportunity to remind everyone that while you are welcome to disagree with someone's comments or advice, responses must be confined to the substance of those comments. Personal attacks, which includes openly questioning someone's motives for posting, are not acceptable here.

[FinancialBalance]

Yeah, thanks to Alex for unflagging my post.

[finanplan]

Thanks to all for the considerate replies, this has been helpful. Like most things finance-wise, I'm going to "stay the course" by continuing to pay down the $30k mortgage. We are going to free up some cash flow, and will hopefully pull in the payoff date to early 2013.

[dhodson]

It isn't easy to understand. That is why too many people purchase these things to begin with.

Whole life is a horrible purchase as an investment but once you have sunk all those costs, surrendering at this point is typically then also a mistake.

Don't get confused into purchasing another policy.

[finanplan]

Agreed. Cheap term and self insuring is the way for me. These policies weren't my purchase choice. They are very confusing indeed,and go against my rule of not investing unless I have understanding of the product.

[patrick]

401(k)'s do not create a tax savings like people think they do - There is a deduction that you get, but it's all paid back in the future (and then some if tax rates increase). The fact is that the tax never goes away because it's deferred into the future. Think of it this way: as the size of the account grows, the tax shadow grows.

Looking at it this way ignores a key advantage of the 401K -- you only have to pay income taxes on the money once. Outside you pay income taxes when you first receive the money, then pay taxes again whenever any interest, dividends, or capital gains are received! The taxes are only "deferred" but at least this prevents you from paying taxes over and over! Because of this advantage there would have to be a very large tax increase to make the 401K worse. And if you consider that many people would be in a lower tax bracket in retirement, it takes a monumental tax increase to overcome the 401K advantage.

[FinancialBalance]

Agreed. Cheap term and self insuring is the way for me. These policies weren't my purchase choice. They are very confusing indeed,and go against my rule of not investing unless I have understanding of the product.

Hey. I typed out a good response and decided to erase it entirely.... I think it's important to understand more of the context of what you wrote, instead of making assumptions.

So... Why do you think you're a cheap term guy?
--Putting rate-of-return aside for a second, is it because you can amass more savings dollar-for-dollar by buying the low pricetag stuff? (ie: lower price stuff allows more savings to be funnelled into insurance)?
--Is this an issue of rate of return? (ie: "I think I can get a 7% ROR average over time in my investments, which is likely better than a permanent product").
--Is it "I don't get WHY I would need life insurance later if I have all these assets."

It might be a combo or something I didn't list out... Just talk me through your position and I'll give an uncommon perspective.

By the way, just to be super clear here, Term insurance and Permanent products are both good products in my book. I'm not going to be "that guy" who tells you to only own one, because they both have appropriate uses. No one likes "that guy"

[FinancialBalance]

401(k)'s do not create a tax savings like people think they do - There is a deduction that you get, but it's all paid back in the future (and then some if tax rates increase). The fact is that the tax never goes away because it's deferred into the future. Think of it this way: as the size of the account grows, the tax shadow grows.

Looking at it this way ignores a key advantage of the 401K -- you only have to pay income taxes on the money once. Outside you pay income taxes when you first receive the money, then pay taxes again whenever any interest, dividends, or capital gains are received! The taxes are only "deferred" but at least this prevents you from paying taxes over and over! Because of this advantage there would have to be a very large tax increase to make the 401K worse. And if you consider that many people would be in a lower tax bracket in retirement, it takes a monumental tax increase to overcome the 401K advantage.

Hey Patrick
Ya, I hear that POV a lot, but there's also no tax Basis in a 401(k) and a different set of taxes apply to money outside of the plan (Cap gains), which is more often going to be more lenient than income taxes when people hit retirement (keep in mind I said MORE OFTEN, not always). In fact, if you think about it that way, the stuff some people would want to grow aggressively is outside of the retirement account! The stable, safer stuff could be inside the Qualified Plan... It's just situational in that regard, Pat.

The "people will be in a lower tax bracket when they retire" position has issues from my perspective.... For one, it just depends. Some people are stuck with having to retire in a lower tax bracket when they retire... Two, would you WANT to be in a lower tax bracket when you retire? I don't, personally.

Keeping taxes 100% the same from 2013 until 3013, are you going to have a higher standard of lifestyle in the future (when you retire) than where you are Today? For me it's an easy question to answer.... If you answer yes, like I do, doing so would require more cash flow. In addition, new inventions, stuff wearing out, unexpected events, medical expenses, and other costs of living create a continual need for more cash flow... which means pulling out at higher rates.

The attitude people have about their money on here is pretty serious, from what I'm reading.... These guys have aspirations that are taking them into higher brackets. I know about almost every tax strategy that's out there, and even I am likely to be in a higher bracket when I retire... I'm going to lose some of my deductions from my business, I'm going to lose my mortgage deduction, and I'll have to pay at taxes who know's what rates, and there's other factors...

[nisiprius]

By the way, just to be super clear here, Term insurance and Permanent products are both good products in my book. I'm not going to be "that guy" who tells you to only own one, because they both have appropriate uses.

What, exactly, are the appropriate uses for whole life insurance for "a couple 30/28 years old, with a 6 month old child?"

[finanplan]

By the way, just to be super clear here, Term insurance and Permanent products are both good products in my book. I'm not going to be "that guy" who tells you to only own one, because they both have appropriate uses.

What, exactly, are the appropriate uses for whole life insurance for "a couple 30/28 years old, with a 6 month old child?"

I don't see a case for it. Bundling investment and insurance comes at a cost,there is no free lunch!

[FinancialBalance]

By the way, just to be super clear here, Term insurance and Permanent products are both good products in my book. I'm not going to be "that guy" who tells you to only own one, because they both have appropriate uses.

What, exactly, are the appropriate uses for whole life insurance for "a couple 30/28 years old, with a 6 month old child?"

Whole Life Insurance is NOT best used for a premature death... That's the last reason someone would want to have it. This guy, at his age, based on my experience with people in this age range, need to be focused on full coverage in all areas financially (life, disability, health, auto, home, umbrella in case of a lawsuit, etc), adequate savings habits, debt management, and a balanced growth strategy. I'd hit those things in the order I listed.

If I were this guy, I'd own what I could get approved for and insure myself with convertible term insurance until all of those things previously mentioned are done. The right amount of coverage is what matters at this stage of the game... Since someone else bought Whole Life for him, let's use it to allow him to complete the things I listed above, which is why I recommended doing a Secured Loan (using his Cash Value as collateral at a third-party bank) to remove the debt.

So to answer your question... People don't need life insurance for retirement, but they want it because of what it is able to do for them. So people convert their term, over time, in a balanced manner, in addition to their other forms of savings... Because we can keep the death benefit on the balance sheet, by nature of the contract, it opens up a lot of different strategies we can do in retirement, if desired: Asset leveraging (spend-downs or accelerated QP distributions), reverse mortgages, he could annuitize his wealth without legacy risk, do CRTs... All of which have significant tax savings, cash flow advantages, among with the ability to mitigate risk... Or he could even stick with a conventional interest-only strategy. What he wants to do when he retires would be up to him... I don't know what will be appropriate in 25+++ years for this guy, but at least he's more appropriately set up to make these decisions down the road. It just so happens that having a form of permanent death benefit needs to be a part of that.

I can't make specific recommendations for this guy, because I don't have all the facts, but I can throw out ideas (like the secured loan) which can help him complete those objectives he asked about.

[FinancialBalance]

By the way, just to be super clear here, Term insurance and Permanent products are both good products in my book. I'm not going to be "that guy" who tells you to only own one, because they both have appropriate uses.

What, exactly, are the appropriate uses for whole life insurance for "a couple 30/28 years old, with a 6 month old child?"

I don't see a case for it. Bundling investment and insurance comes at a cost,there is no free lunch!

That kind of answers my questions from earlier... Read what I wrote at 3:36pm, try to answer those. I got into some meat at the 4:33pm post, which will help drill down on its uses.

I also edited it just a minute ago to add a sentence, which I thought was important enough to include.

[finanplan]

By the way, just to be super clear here, Term insurance and Permanent products are both good products in my book. I'm not going to be "that guy" who tells you to only own one, because they both have appropriate uses.

What, exactly, are the appropriate uses for whole life insurance for "a couple 30/28 years old, with a 6 month old child?"

I don't see a case for it. Bundling investment and insurance comes at a cost,there is no free lunch!

That kind of answers my questions from earlier... Read what I wrote at 3:36pm, try to answer those. I got into some meat at the 4:33pm post, which will help drill down on its uses.

I also edited it just a minute ago to add a sentence, which I thought was important enough to include.

I hope, though who can know for sure, that my consumption in retirement is lower than present. Not having debt to service, child-related expenses, and a relatively simple lifestyle pushes me towards that conclusion. I don't view a 7% long term market return, before inflation, as a pipe dream, but I plan for 6% in my projections. We are looking, even at this point in our lives, to live more frugally.

[finanplan]

Also, I don't understand most of what you are speaking about. Save early, save often, and look to minimize compounding fees makes sense to me. I'm not the brightest guy investment-wise, but I can appreciate a simplistic, broad approach and feel comfortable as I understand it (and lack the time to actively manage).

[bluemarlin08]

Be Wary of Whole Life threads

[FinancialBalance]

I hope, though who can know for sure, that my consumption in retirement is lower than present. Not having debt to service, child-related expenses, and a relatively simple lifestyle pushes me towards that conclusion.

If it is, great! Maybe look at it this way, though: Most people spend their money on Saturday. When you retire, it's Saturday every day of the week. There are also things that pop out of the blue that cost a lot of money. Because your retirement life could possibly require a greater demand for cash flow, just make a strategy around it... If you're correct about your consumption being lower than present, you're even further ahead of the game (which is not a bad thing).

Just be aware that there are things out of our control that are going to make the Reduced Consumption goal very challenging: rising healthcare costs, inflation, new technology that comes out that you'll want to get, (GPS's, smart phones), tax law changes (the more you save the more you get punished for it), national social issues (Social Security and Medicare benefits, national debt). So maybe consider your financial strategy from an engineering perspective: When you build a bridge, you overbuild it for worst case scenarios... The George Washington Bridge will withstand 8 lanes of Bumper-to-bumper traffic of 18-wheeler trucks during a hurricane.... when someone builds a financial strategy, they should do the same. Not every day will be sunny, there could be more bear years than bull years, our timing may not be perfect, taxes could be jacked, and we might need more money than we thought. The best way to counter these problems is your advice of "Save early, Save Often"

I don't view a 7% long term market return, before inflation, as a pipe dream, but I plan for 6% in my projections. We are looking, even at this point in our lives, to live more frugally.

6% might be realistic, but it's a number that's largely out of our control. Even if the money was professionally managed, they cannot put it in a contract to you stating they guarantee 6%. There are things you can do to increase your long-term returns, but it's still not a lock.

Is your 6% number net of inflation? Is it net of taxes, fees, commissions? Just curious. I wouldn't feel comfortable hinging the success of someone's financial strategy (their future livelihood) on a number that's out of anyone's control. Saving as much as you can (20%+ of gross) will disarm the necessity of needing a high rate of return for success.

Also, I don't understand most of what you are speaking about. Save early, save often, and look to minimize compounding fees makes sense to me. I'm not the brightest guy investment-wise, but I can appreciate a simplistic, broad approach and feel comfortable as I understand it (and lack the time to actively manage).

You said you don't know what I'm speaking about... Which part? I don't mind elaborating, obviously. If it's the part where I brought up things like "Asset leveraging, spend-downs, accelerated QP distributions, reverse mortgages, annuitizing wealth, CRTs", I wouldn't worry about them for right now. But those are things that you should be building your strategy towards; having the correct, available amount of convertible term insurance is the critical component.

"Save early, save often and avoiding costs" is SOLID... We already addressed saving, but the 2nd component we need to dive into is cost avoidance... Avoiding costs is how wealth erosion is avoided (quite simply it means when people bleed money). The reason I've gone to elaborate lengths in my posts is to point out that there's more to minimizing costs than what it seems. There are tax costs, management fee costs, term costs, time-value of money costs, loss of losing death benefit in retirement costs.... When you lose death benefit in retirement, you lose the ability to take advantage in these cost reducing strategies that I mentioned in the earlier paragraph that could be within your best interests, which is my concern when you say you're a cheap term insurance guy. The death benefit in term designed to be temporary; the temporary nature increases the costs I just mentioned... which is problematic to your long-term Savings and growth objectives. What you think might be reducing costs is actually adding them. I can justify this position as well.

All of this discussion actually stems back to your concern in your original post which is doing the right thing financially to avoid costs. It might take 2-3 times to absorb what I'm talking about, or it might require you to post more questions... Either way, I hopefully have facilitated a conversation that will allow you to reach your objectives.

[FinancialBalance]

Be Wary of Whole Life threads

I found out that it was a sore topic here after I tried making my first respond in this thread by getting banned.

Alex unbanned me after reviewing my post and he's still watching the thread. There are salesmen who are desperate for sales who might try to lurk here, but I enjoy the topic, and I hope you'll agree that you don't see me making emotional arguments in my posts.

[patrick]

Ya, I hear that POV a lot, but there's also no tax Basis in a 401(k) and a different set of taxes apply to money outside of the plan (Cap gains), which is more often going to be more lenient than income taxes when people hit retirement (keep in mind I said MORE OFTEN, not always). In fact, if you think about it that way, the stuff some people would want to grow aggressively is outside of the retirement account! The stable, safer stuff could be inside the Qualified Plan... It's just situational in that regard, Pat.

[Edited this paragraph] For starters, I'll point out that if you really do expect to be in a higher (or even the same) tax bracket in retirement, the Roth 401K is clearly the best choice versus investing outside, since it has no taxes at all on gains within it or on withdrawals. However, if we want to compare the 401K with the taxable account when tax rates might be higher, let's look at some rough approximate calculations to see what could happen.

For starters, note that the tax rate on capital gains within the 401K is zero-- much better than outside! So if you want a proper comparison, you must compare the income tax rate at retirement (the only one that applies to the 401K) with the combination of ordinary income tax while working and dividend taxes all along

As a hypothetical example, let's say you had an investor 30 years away from retirement, considering what to do with $10000, in the 28% tax bracket (15% for dividends/capital gains) while working, and investing in something that pays 2% a year in qualified dividends (after expenses) and rises 5% a year in price, with capital gains not realized until retirement.

In the traditional 401K, the investment becomes $76122.55.

In the taxable account, you have to pay 28% in taxes at the start so you can only invest $7200. And then you have to keep paying dividend taxes every year, plus capital gains taxes at the end. After 30 years this would have grown to $50380.08 (after taking out 15% of the dividend amount, or 0.3% of the whole amount, for dividends each year). But when you sell it you still have capital gains to pay, the result being another $4832.95 in capital gains taxes, leaving you with only $45547.13 left.

The result is that your tax rate must increase to a little over 40% in order for the traditonal 401K to be at a disadvantage. This means you have to skip multiple tax brackets, more than doubling your income! Of course there are many details I left out in my rough estimate, but in many cases (such as state taxes, and the fact that if your income is that high you'll probably jump to the 20% capital gains tax bracket) they will make the 401K advantage even larger.

It may be situational but it is very hard to think of a realistic situation in which taxes increase enough to disadvantage the 401K. Of course, there is a completely different reason the taxable account could be better -- when your employer's 401K has excessively high costs and you will be staying with that employer for a long time.

The "people will be in a lower tax bracket when they retire" position has issues from my perspective.... For one, it just depends. Some people are stuck with having to retire in a lower tax bracket when they retire... Two, would you WANT to be in a lower tax bracket when you retire? I don't, personally.

Keeping taxes 100% the same from 2013 until 3013, are you going to have a higher standard of lifestyle in the future (when you retire) than where you are Today? For me it's an easy question to answer.... If you answer yes, like I do, doing so would require more cash flow. In addition, new inventions, stuff wearing out, unexpected events, medical expenses, and other costs of living create a continual need for more cash flow... which means pulling out at higher rates.

The attitude people have about their money on here is pretty serious, from what I'm reading.... These guys have aspirations that are taking them into higher brackets. I know about almost every tax strategy that's out there, and even I am likely to be in a higher bracket when I retire... I'm going to lose some of my deductions from my business, I'm going to lose my mortgage deduction, and I'll have to pay at taxes who know's what rates, and there's other factors...

A higher tax bracket in retirement is possible but not normal. It's certainly not the same as having a higher standard of living in retirement!

If you want to have a good chance of a higher retirement standard of living, you'll have to save more than the maximum allowed in your IRA/401K (unless you have a fairly low income, in which case you'll probably be saving very little and relying mainly on Social Security anyway). This means that, while working, your spending will be significantly less than your taxable income. On the other hand, once you retire, you can spending more than your taxable income, since some of your spending can come out of the basis of the taxable investments you had to buy earlier. So you can support a significantly higher standard of living even without raising your taxable income. From my estimate above, you'd need to more than double your income to erase the 401K advantage, which would probably correspond to tripling your standard of living -- very unlikely.

Stuff breaking and needing to be replaced always happens, retired or not. Business deductions, if part of the cost of doing business, weren't part of income anyway (the corresponding expenses are gone when no longer operating the business). And the mortgage deduction is only for the interest and only a deduction, not a credit. If you lose the deduction because you paid off the house, then you can support an even greater standard of living on the same income since the tax gain from the deduction is much less than the total mortgage payment that you now no longer need!

[dhodson]

whole life is a product which has been around for what 200 years yet there isnt one independent study showing it as a good investment.

You should insure for the amount and time you need coverage. Most policies lapse/fail as well.

Over a long period of time (your non premature death), the odds greatly favor having more to spend if you dont use whole life. You mentioned that leaving money behind at your non premature death isnt a priority.

Dont get confused by people who pretend whole life is a good product for much more than a permanent death benefit. If you need a permanent death benefit or want one knowing you can leave behind a guaranteed amount upon your death (although likely less money than if you used non insurance routes including the tax angle and dont die prematurely) then whole life allows some loans later in life and no lapse gUL typically is the cheapest for the same death benefit but has less to no cash value if you ever surrender or want a loan.

If you have owned a whole life policy for a long period of time, while it may have been a mistake to purchase it, dont immediately surrender it without considering your options. If you have good credit, then you likely can get a home mortgage at a lower rate then some secure loan based on your whole life. If you have bad credit or other factors then you might have a hard time finding someone to place a lot of value on the whole life policy to give you a super rate. There is nothing to say you wont cash it out or that it still wont lapse. Dividends arent guaranteed and a premium is required every year for whole life that isnt a limited pay policy. It may come out of dividends at some point or it may not.

[Alex Frakt]

401(k)'s do not create a tax savings like people think they do - There is a deduction that you get, but it's all paid back in the future (and then some if tax rates increase). The fact is that the tax never goes away because it's deferred into the future. Think of it this way: as the size of the account grows, the tax shadow grows.

Looking at it this way ignores a key advantage of the 401K -- you only have to pay income taxes on the money once. Outside you pay income taxes when you first receive the money, then pay taxes again whenever any interest, dividends, or capital gains are received! The taxes are only "deferred" but at least this prevents you from paying taxes over and over! Because of this advantage there would have to be a very large tax increase to make the 401K worse. And if you consider that many people would be in a lower tax bracket in retirement, it takes a monumental tax increase to overcome the 401K advantage.

Hey Patrick
Ya, I hear that POV a lot, but there's also no tax Basis in a 401(k) and a different set of taxes apply to money outside of the plan (Cap gains), which is more often going to be more lenient than income taxes when people hit retirement (keep in mind I said MORE OFTEN, not always). In fact, if you think about it that way, the stuff some people would want to grow aggressively is outside of the retirement account! The stable, safer stuff could be inside the Qualified Plan... It's just situational in that regard, Pat.

You are flat out wrong about this. The end end value of the deferred savings will be greater than the end value of the taxable savings unless your tax rate in retirement is far higher than at the time you earned the income. I'll give an example.

Assume a $10,000 pre-tax contribution 28% tax bracket, 15% dividend and capital gains tax rate, 4% annual capital gains growth which will not be realized until the end of the period and 2% dividend payout which will be reinvested. "Net" means cash out value after all taxes are paid.

At the end of year 1, it looks like this:
Deferred account: $10,000 contribution + $400 gains + $200 dividends = $10,600. Net = $7,632
Taxable account: $7,200 contribution + $288 gains + $122.40 dividends (i.e. $144 - 15% tax) = $7,610.40. Cost basis $7,322.40. Net = $7,567.20
Net shortfall from using taxable = $64.80

At the end of year 2, we get:
Deferred: $10,600 + 424 gains + 212 dividends = $11,236. Net = $8,089.92
Taxable: $7,610.40 + 304.42 gains + 129.38 dividends = $8,044.20. Cost basis = $7,451.78. Net = $7,955.38
Net shortfall from using taxable = $134.54

Run it out as long as you like and the net shortfall will increase every single year. The greater the capital gains and/or dividend payments, the larger the shortfall. You will only come out ahead with a taxable account if there is a loss in value over the entire holding period or the tax rate when you sell from deferred is substantially higher than the average tax rate when you initially earned the income.

[finanplan]

Perhaps my plan is rather simplistic. Saving the max in mine and wife's 401k and maxing our Roth space yearly (41k space), and investing in low cost index funds according to my asset allocation plan (80% equities, 30% of which is international, 20% bond, using Schwab ETFs available in Roth and primary 401k). Reducing consumption and saving more, eventually into taxable space. My Saturdays are cheap, with the biggest expense being driving my car to meet up with a group for 50 or so miles on the bicycle.

I do, however, live 32 miles from work, wife is close to 40 one way. This is an area in which I'm looking to cut spend, by considering a move in the next few years.

As far as a refinance, my loan to value kills that prospect. I bought in at the peak, 2005, and have lost 40k on that deal (such is life!)

[FinancialBalance]

Finanplan, Patrick, Alex: Sorry for the delay. I'm going to try to handle both Alex & Patrick's responses, because I think there's commonality between them.

[Edited this paragraph] For starters, I'll point out that if you really do expect to be in a higher (or even the same) tax bracket in retirement, the Roth 401K is clearly the best choice versus investing outside, since it has no taxes at all on gains within it or on withdrawals...

Agreed, it's just situational. There are people who do retire in a lower tax bracket, but it's not often by choice over time.

...However, if we want to compare the 401K with the taxable account when tax rates might be higher, let's look at some rough approximate calculations to see what could happen.

For starters, note that the tax rate on capital gains within the 401K is zero-- much better than outside!...

The capital gains rate for 401(k) is not zero. There is no capital gains treatment.

...So if you want a proper comparison, you must compare the income tax rate at retirement (the only one that applies to the 401K) with the combination of ordinary income tax while working and dividend taxes all along. As a hypothetical example, let's say you had an investor 30 years away from retirement, considering what to do with $10000, in the 28% tax bracket (15% for dividends/capital gains) while working, and investing in something that pays 2% a year in qualified dividends (after expenses) and rises 5% a year in price, with capital gains not realized until retirement.

In the traditional 401K, the investment becomes $76122.55...

The other part you're missing: The $2,800 tax tag from year one compounded over time to ~21,314 over time... Net value would be $54,808

In the taxable account, you have to pay 28% in taxes at the start so you can only invest $7200. And then you have to keep paying dividend taxes every year, plus capital gains taxes at the end. After 30 years this would have grown to $50380.08 (after taking out 15% of the dividend amount, or 0.3% of the whole amount, for dividends each year). But when you sell it you still have capital gains to pay, the result being another $4832.95 in capital gains taxes, leaving you with only $45547.13 left...

I know what you're saying, but I think you and Alex ran past my point - or maybe I wasn't as thorough as I should have been... So let me see if I can kill two birds with one stone here... There's another tax-free place to put money that's not a ROTH and that's not being taxed every year... It's his choice of where it goes (tax-free account or taxable) since it's already been exposed to income taxes. If the features he desires are something tax-free he could only really choose Munis, a ROTH(k) if he has access to one, or Whole Life.

If he goes with Whole Life, it will eliminate other losses that are occurring that he's not "feeling" - these are difficult to calculate and quantify: The sum of the term insurance premiums lost, the growth which could have occurred over the same 30 years off those premiums had they not been lost, loss of death benefit, and how loss of death benefit impacted his cash flow flow off the other asset he's accumulated (stocks, bonds, M/Fs, 401k, IRA, Real Estate, ROTHs, Pensions, Annuities)... The power is in the death benefit.

Back on point - it's not a matter of 'taxable account vs. tax deferred.' People want certain features of having a taxable asset (liquidity, tax strategy, basis, additional asset selection, collateral use, etc) and that's why they choose them... But I think it's unfair to assume this $7,200 can't go into a tax-free asset.

The result is that your tax rate must increase to a little over 40% in order for the traditonal 401K to be at a disadvantage. This means you have to skip multiple tax brackets, more than doubling your income! Of course there are many details I left out in my rough estimate, but in many cases (such as state taxes, and the fact that if your income is that high you'll probably jump to the 20% capital gains tax bracket) they will make the 401K advantage even larger.

I know what you're saying, but there's a lot of factors here... Rates *could* actually go that high over time people do progress through brackets, and brackets will change ranges.... Highest bracket used to be 94%. I don't think it'll ever hit that again, but anything I say would be a guess, at best.

Don't worry about your estimates... Afterall, our crystal balls are equally as worthless Tax rates, brackets, and rules are going to change non-stop... But, IMHO, my advice sets people up for greater long-term flexibility on what tax laws could change to over time because of strategy, diversifying the taxable treatment of our assets, and having death benefit to unlock wealth in our assets.

It may be situational but it is very hard to think of a realistic situation in which taxes increase enough to disadvantage the 401K. Of course, there is a completely different reason the taxable account could be better -- when your employer's 401K has excessively high costs and you will be staying with that employer for a long time.

A higher tax bracket in retirement is possible but not normal. It's certainly not the same as having a higher standard of living in retirement!


Stuff breaking and needing to be replaced always happens, retired or not. Business deductions, if part of the cost of doing business, weren't part of income anyway (the corresponding expenses are gone when no longer operating the business). And the mortgage deduction is only for the interest and only a deduction, not a credit. If you lose the deduction because you paid off the house, then you can support an even greater standard of living on the same income since the tax gain from the deduction is much less than the total mortgage payment that you now no longer need!

"Normal" isn't a good thing when it comes to finances. People are retiring living off of bare minimums (low incomes) and rely on social security. It happens all the time to the people who own the majority of wealth in this country.

The other costs of living (stuff breaking and needing replacement) still require additional income.

The business is/was a method of reducing taxes that you would have otherwise had to pay had you not owned a business... Barring true business expenses, there are many deductible personal benefits that carry over to someone's personal balance sheet & cash flow that disappear. Business owned automobiles, health insurance premiums, "other things" deducted through the business that the CPA allows for...

The mortgage interest deduction is exactly how it sounds - a deduction for the interest you pay for a mortgage (not a credit) - I'm very aware... But the paying off the house = higher standard of living is entirely not true.... Sometimes it makes since to continually pay down on the house, rather than tying up a bunch of potentially income-producing capital into a non-producing asset. Yes, it frees up future cash flow, but it's robbing you of what that cash was doing somewhere else in your financial strategy & the deductible interest... If you have a 8% asset and that was your only capital to pay off your home, why on earth would someone use it to pay off their low interest-rate mortgage? (Rhetorical question - don't answer it because it'll further get things off topic, LOL)

Everything is situational, but there are many assumptions that you speak of that simply aren't always a reality...

[dhodson]

Money placed into whole life is at marginal tax rates as compared to withdrawal from 401k at effective. For 99% of people that makes 401k substantially superior.

Tax treatment for insurance can just as easily change period. It's inappropriate to assume otherwise and pretend that gives permanent insurance a false advantage.

[FinancialBalance]

Perhaps my plan is rather simplistic. Saving the max in mine and wife's 401k and maxing our Roth space yearly (41k space), and investing in low cost index funds according to my asset allocation plan (80% equities, 30% of which is international, 20% bond, using Schwab ETFs available in Roth and primary 401k). Reducing consumption and saving more, eventually into taxable space. My Saturdays are cheap, with the biggest expense being driving my car to meet up with a group for 50 or so miles on the bicycle.

I do, however, live 32 miles from work, wife is close to 40 one way. This is an area in which I'm looking to cut spend, by considering a move in the next few years.

As far as a refinance, my loan to value kills that prospect. I bought in at the peak, 2005, and have lost 40k on that deal (such is life!)

It sounds like you're wanting to do the right thing by saving, but there's things you mentioned that over the long term are more costly. The costs of term only and drop it will far exceed the costs of your commute to work. My opinion will certainly NOT be popular, but I don't sway based on my expertise in macroeconomic planning. My appearance was purely to help you and set a thread that could be referred back to.... The Whole Life topic will come up again.

When I start to repeat myself, it's time for curtains, but a summary of all my posts would be nice, wouldn't it?: Whole life is not for a premature death. It is not to be looked at as an investment. It is not to be compared to a 401(k). Whole Life is a leveraging tool for your other assets and helps create a balanced financial strategy...
---The death benefit allows you to spend down your assets over time to increase cash flow off your other assets
---decreases your taxes on those assets (through strategy)
---maximizes access to a tax free income
---provides a lot of internal protections to someone's strategy (long-term death, disability to an extent, lawsuits, tax increases on other assets)
---and unlocks options in retirement that you wouldn't have access to without it.

If it was such a bad product, the industry would've stopped making it ages ago.... The reality is that the wealthy own a lot of it, politicians own it, banks own it, executives own it, I own it (and will own more later through term conversions), and successful middle & upper class income earners should own it.

I'd look into the secured loan against your Whole Life policies to help complete your objectives and keep the permanent Death Benefit in force. I hope I helped.

[FinancialBalance]

Money placed into whole life is at marginal tax rates as compared to withdrawal from 401k at effective. For 99% of people that makes 401k substantially superior.

In my experience, salesmen do this as a tactic to sell it, which I don't think is always fair... Commonly, they use it as a "this engine is better than that 401(k) engine" argument. It shouldn't be done that way, because it's apples & oranges.

Professionally speaking, these salespeople aren't looking at the product correctly (holistically), and most likely aren't developing a strategic use for it...

[dhodson]

False statement about allowing more income to be spent. Whole life costs money. That money could be spent in retirement instead of on those premiums. Since the return is so low, a lot of money as well.

Tax free income is at a loan typically 8% and can easily crash the policy.

Unlocking of retirement benefits is false yet again.

Whole life is such a wonderful product that the majority surrender or lapse the product.

[FinancialBalance]

False statement about allowing more income to be spent. Whole life costs money. That money could be spent in retirement instead of on those premiums. Since the return is so low, a lot of money as well.

Tax free income is at a loan typically 8% and can easily crash the policy.

Unlocking of retirement benefits is false yet again.

Whole life is such a wonderful product that the majority surrender or lapse the product.

Not false. What you posted is just your opinion. The question at this point would be "Who has the most powerful opinion?"

You're confusing price and cost. There is a price tag for Whole Life insurance, and it is high; however, there is no cost if there's a greater value extracted than what you originally would have realized without it. Traditional planning looks largely (purely, IMO) at price tag, rather than doing the work to uncover and evaluate the costs. The planning work I run up against confuses the two all the time.

Unlocking retirement benefits is false...How? You can tap capital you otherwise aren't able to tap without legacy consequences. Again, this is all your opinion. I can measure my opinion with facts, calculations, and an approach that adds features people want. Please don't troll.

[dhodson]

I'm not confusing anything.


The proof for whole life is that most people who have purchased it decide to get rid of it. That should tell you something if you are considering purchasing it.

[FinancialBalance]

I'm not confusing anything. .

You did, otherwise you wouldn't have written what you wrote. Moving forward...

The proof for whole life is that most people who have purchased it decide to get rid of it. That should tell you something if you are considering purchasing it.

I disagree with you here... Just because people do something doesn't mean it's within their best interests.... Look at it this way (this is the best example I can come up with): January 1st of every new year people buy & sign gym membership contracts with the gym's commitment to provide a nice place to work out and get healthy over the long-term... Just because 9 out of 10 people cancel their contracts by February (which happens) doesn't mean everyone should cancel theirs and stop working out...

People ditch strategies all the time...

Quite often products are not suitably recommended. I've had a recent case where a permanent product was horribly placed... I know of the advisor and he's actually a nice guy who thought he was doing the right thing, but being nice doesn't make someone a professional. Long story short, the client needed access to his funds and couldn't get to them without surrender charges... The public doesn't often realize that it's a long-term contract that they're signing... For a price of 'X' you get this contract honoring the mid or long term benefit of 'Y'. It's an advisor problem that I think people have valid court cases over when advisors/agents are negligent in their product recommendations.

Quite often people forget. They bought it for valid, logical reasons but forget why they bought it... The public, even the money aficionados, aren't financial experts. They don't do research, keep up with industry/market changes, or have the time or desire to refresh themselves on the mechanics of their strategy. Why? They're busy. They have a personal life, a professional life, and a financial life. Of the 3, people barely have time for 2 of them; guess which one gets neglected? So advisors lie by promising "annual reviews," which rarely ever take place, promising that they'll review everything and life is great... The next problem is whether or not the advisor is even in the business next year. I think the failure rate for people within the first 5 years is 95%.... Anyways, people literally lose sight of the long term because stuff happens: market scares, financial news, personal scares, etc... and people cancel things because they do some simple math by themself and they heard their friends talking about how stupid it is to do "x" and how no one should do it. -OR- They turn on the TV and listen to "financial gurus" who say never buy Cash Value anything and they call it Trash Value.... Seriously, people's heads get filled up and they get disoriented. In my opinion, it boils down to a shotty relationship and poor communication with the client... Here's what happens: The client doesn't want to piss off/hurt the feelings of their advisor or agent, so they call a 1-800 number and it's done... By the time the agent-advisor finds out, the damage has been done (or in this case the Life Insurance policy is within or has started its grace period). Most agents are lazy & they've already been paid, or are completely orphaned and no one really cares. It's not right, but it happens all the time.

Quite often people are sold, rather than taught that's in their best interest. The easy sale is term insurance. No one (seriously, no one) is initially interested in buying whole life insurance. If I told people at a party that I recommend Whole Life sometimes, no one would talk to me after that point, lol. If I wanted to be in sales, I would actually sell something people wanted (like Cars or Boats)... The big hurdle is effective communication... The stuff I posted about in here is difficult, uncommon stuff... For a reader of this thread to truly 'get it', I'd need an open conversation, the ability to draw and tell stories, my tools to verify the accuracy of what I'm saying, and quickly point back to where the underlying problem exists and how it needs a solution. I have NONE of that on a message board, so this is virtually a suicide mission for me to post; but, I enjoy discussing finance.... Charlatans exist in this business; unsuitable recommendations to replace policies DO occur, which to your comment about lapse rate,, doesn't help...

Anyways, there's always salespeople wanting to sit down with my clients... If my client hears something that might be the hottest new idea/product/strategy/thing, they could very well be distracted with whatever the salesmen is pushing for the 3 reasons I mentioned above. Historically, with one exception, they call me first and want my thoughts before doing anything. There's a strong reason for that, too.

Trickier scenarios do exist: divorce, lost job, guy chooses to go elsewhere with his business, but I don't really experience those problems... I've had clients lose jobs before, but I'm also not recommending products that require a substantial portion of their cash flows to people who can't sustain them. It's common sense.

[patrick]

The capital gains rate for 401(k) is not zero. There is no capital gains treatment.

Well, I suppose you could call the tax on withdrawals a "capital gains" tax to the extent that it taxes amounts in the 401K that were there because of capital gains. But that hardly makes sense because is applied only once, on withdrawal, not when gains are made or realized, and it applies regardless of whether the funds were due to original contributions, capital gains, dividends, or interest.

The other part you're missing: The $2,800 tax tag from year one compounded over time to ~21,314 over time... Net value would be $54,808

I hardly missed it, since I explicitly discussed the effect of the tax at withdrawal! Unless "tax tag" means something else...

The other costs of living (stuff breaking and needing replacement) still require additional income.

Additional compared to what? If you had to pay it before retirement, then it's not an additional expense of retirement, and therefore not a reason you need more money in retirement. Or were you suggesting that nothing breaks before retirement? And furthermore you didn't have to pay for the original item the first time you bought one?

Everything is situational, but there are many assumptions that you speak of that simply aren't always a reality...

I did, however, make sure to cover a wide variety of possible situations, including ones in which you could support more spending in retirement without going into a higher tax bracket, and much more spending without jumping enough tax brackets to make the 401K a disadvantage versus taxable (though of course at a disadvantage to Roth 401K). Tax changes are highly speculative but could happen in many ways, with many different results. A dividend / capital gains tax increase makes things relatively better for the 401K, and a consumption tax increase is neutral.

[Frugal Al]

People ditch strategies all the time...

In the long run most people do what is in their own best interest, if they have all the facts. Most people ditch whole life insurance because they decide they either can't afford it, don't need it, and/or it wasn't the correct strategy to begin with. Buyers are often sold a bill of goods they didn't totally understand and/or didn't understand the alternatives. Whole life insurance is suitable for a very small fraction of insureds.

The costs of term only and drop it will far exceed the costs of your commute to work.

First of all, you have no knowledge of the distance of my commute to work. Secondly, the cost of term insurance pales in comparison to the high cost of whole life insurance when premature policy terminations, inadequate insurance coverage, and lost investment opportunity is considered.

You're confusing price and cost. There is a price tag for Whole Life insurance, and it is high; however, there is no cost if there's a greater value extracted than what you originally would have realized without it

Opportunity cost is a very real cost.

If it was such a bad product, the industry would've stopped making it ages ago.... The reality is that the wealthy own a lot of it, politicians own it, banks own it, executives own it, I own it (and will own more later through term conversions), and successful middle & upper class income earners should own it.

Well, we all know how bright some of our politicians are, don't we?. As for the others on your list, you're using a classic sales gimmick that "if something is good for these successful and influential people, then it must be good for you too, Mr. Average Insurance Buyer." And that just isn't the case.