Whole Life. Can someone sum up why its a sucker scam (in as few words as possible)

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TorturedRegret
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Whole Life. Can someone sum up why its a sucker scam (in as few words as possible)

Post by TorturedRegret » Wed Nov 11, 2015 11:36 am

At a party, I want to be able to explain in under 20 seconds why it's bad investing.
Whole Life. Can someone sum up why its a sucker scam like extended service coverage (in as few words as possible).

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Re: Whole Life. Can someone sum up why its a sucker scam (in as few words as possible)

Post by bloom2708 » Wed Nov 11, 2015 11:44 am

It's expensive, has a lousy rate of return and whatever you pay in over the years you only get the face value of the policy. They keep all your money you paid in to the "great" investment, your beneficiary gets the policy value.

Buy 10, 20 or 30 year fixed Term Life Insurance.
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Re: Whole Life. Can someone sum up why its a sucker scam (in as few words as possible)

Post by ObliviousInvestor » Wed Nov 11, 2015 11:47 am

This is an oversimplification, but here goes:

It is life insurance, coupled with a safe but very low-return investment. For most people, it makes sense to separate those decisions: buy term life insurance (which costs quite a bit less), then invest in whatever way is a good fit for their needs.

But when you buy term life insurance and take your investment capital elsewhere (e.g., Vanguard) the insurance agent makes a much smaller commission.

If you haven't read EmergDoc's series on the topic, I highly recommend it:
http://whitecoatinvestor.com/debunking- ... insurance/
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Re: Whole Life. Can someone sum up why its a sucker scam (in as few words as possible)

Post by YttriumNitrate » Wed Nov 11, 2015 11:47 am

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Re: Whole Life. Can someone sum up why its a sucker scam (in as few words as possible)

Post by livesoft » Wed Nov 11, 2015 11:54 am

All the young whole life insurance agents in my neighborhood moved out to buy bigger houses in fancier neighborhoods. Their money had to come from somewhere.
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Re: Whole Life. Can someone sum up why its a sucker scam (in as few words as possible)

Post by itstoomuch » Wed Nov 11, 2015 12:02 pm

"It'$ life insurance. ¿How much did you pay? :confused :annoyed :oops: :lol:"

[The emoticons, are important]
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Re: Whole Life. Can someone sum up why its a sucker scam (in as few words as possible)

Post by Pizzasteve510 » Wed Nov 11, 2015 12:06 pm

Whole life = life insurance + investment account

* High fees on investment portion of combined product make it a bad deal.
* Relatively expensive life insurance for insurance portion make it a bad deal.
* Claims of 'guaranteed returns' are a mirage, the guarantees have fine print that make them effectively guaranteeing your returns with your own gains, which is a not true assurance. You need to read and understand a lot of fine print to 'get this'.

If whole life offered cheap insurance plus low fee investments, them it might be worth considering, but that has never been offered.

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Re: Whole Life. Can someone sum up why its a sucker scam (in as few words as possible)

Post by goingup » Wed Nov 11, 2015 12:12 pm

Buy term and invest the difference. (There's a reason this old saw has been around for 100 years.)

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Re: Whole Life. Can someone sum up why its a sucker scam (in as few words as possible)

Post by downshiftme » Wed Nov 11, 2015 12:14 pm

You have to pay for the insurance part. You have to pay for the (fairly generous) commissions to the agent that sold it. You have to pay for the insurance company profit. What's left gets invested. The investment gains are divided and you get part and the company/agent gets part.

Compared to your own investment, where ALL the money gets invested and you get to keep (almost all) the gains, there's no way whole life can deliver better results.

Insurance companies (and agents) know this, so they get very good at telling part of the story to make it look more attractive. The more confusing the better, with loans and values and funny charts, because they have to baffle you to make this sound attractive. They are also experts on what they can and cannot say legally to make claims sound more attractive than they really are. Projected results are mostly fiction.

In certain cases, the tax laws treat your own investments one way and life insurance proceeds differently. If you are one of the rare people in such a high bracket or facing an impending estate tax event, it's possible even with all the money draining shenanigans of the insurance company, this tax treatment will still result in a whole life insurance product getting you more money. It's really rare, but every agent and insurance company will add that to the baffling presentations to make it seem like it might apply to you. If you really are this case, you need a very very good tax lawyer.

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Re: Whole Life. Can someone sum up why its a sucker scam (in as few words as possible)

Post by Epsilon Delta » Wed Nov 11, 2015 12:15 pm

The entire first years premium goes to the insurance agent.

There's no fundamental reason a whole life policy couldn't be a good deal, they just aren't, probably because selling complexity makes it easier to hide fees.

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Re: Whole Life. Can someone sum up why its a sucker scam (in as few words as possible)

Post by sco » Wed Nov 11, 2015 12:20 pm

They are riddled with fees, one of the most profitable things and agent can sell...

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Re: Whole Life. Can someone sum up why its a sucker scam (in as few words as possible)

Post by White Coat Investor » Wed Nov 11, 2015 12:22 pm

Unfortunately, there is no good way to explain why it's usually a bad move quickly.

But you might try this:

Whole life insurance can be used for many different financial purposes, but really isn't the best financial product for any purpose. For example, you can use it for life insurance, but term is better. You can use it as an investment, but stocks and real estate are better. Unfortunately, the fact that it can be used for many different reasons, and it pays a very high commission to its salesmen, means it is dramatically oversold.

Then throw in the two key statistics:

1) The total commission is 50-110% of the first year's premium.
2) 80% of whole life policies are surrendered prior to death. That is a damning statistic for a product designed to be held until death.
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Re: Whole Life. Can someone sum up why its a sucker scam (in as few words as possible)

Post by spectec » Wed Nov 11, 2015 12:26 pm

I've suggested that people tell me why insurance companies don't also sell homeowner's insurance and auto insurance with an "investment feature" component. After all, with those policies you are basically insuring the life of your home or car. The answer, of course, is that these two are a commodity product with most decisions being price sensitive. However, it's easy to arouse emotions when discussing one's potential death, so that makes it simpler to induce people to make irrational decisions that cost them a lot of money. If they will think of insuring their own life in the same manner as insuring the life of a tangible possession, they will likely make more rational choices.

I also tell my insurance agent that when Consumer Reports starts recommending whole life insurance (and/or annuities), I'll give it some serious thought.
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Re: Whole Life. Can someone sum up why its a sucker scam (in as few words as possible)

Post by dratkinson » Wed Nov 11, 2015 12:47 pm

Should you die early, life insurance protects the financial lives of your dependents. If you have no dependents---because it's before you have them, or after they are financially independent---then you don't need life insurance.

For the time period when you do have dependents, and so need life insurance, then buy term insurance to cover only the time-period in which you need to protect your dependents. Why? Buying only the protection you need, and only for the time-period in which you need it, is cheaper.

The alternative---whole life---has you buying more insurance then you need and paying more for it. But the greater total fees are good for the commission-based insurance agent and company. To paraphrase Meat Loaf: "Two out of three (benefiting) ain't bad."

The whole-life insurance spiels about "investing" and "return of premium" are misdirections to distract from the fact that whole-life insurance does not well stand on its own. Even if you get all (or more) of your money back, the insurance company still had many years to benefit from investing the float on your excess payments.

So the preferred alternative is to buy separate insurance and investing products, each of which does well stand on their own. Of course this logic can not be understood by an insurance agent, so if this is your party intention, then you are wasting your time. The best use of this knowledge is to protect yourself/dependents/friends from whole-life salesmen.

If you have not already done so, suggest reading "The Only Investment Guide You'll Ever Need" by Andrew Tobias. I covers a wide range of personal finance topics: debt, credit cards, life insurance, introductory investing,....
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Re: Whole Life. Can someone sum up why its a sucker scam (in as few words as possible)

Post by JonnyDVM » Wed Nov 11, 2015 1:01 pm

Monster commission for the guy that sells it you. That's never a good thing. Term life and investments outside of an insurance policy are significantly better options.
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Re: Whole Life. Can someone sum up why its a sucker scam (in as few words as possible)

Post by clydewolf » Wed Nov 11, 2015 1:27 pm

When you buy life insurance, you are saying, "I bet I am going to die soon."
The insurance company is saying, "Oh no you won't. Keep those premiums coming!"

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Re: Whole Life. Can someone sum up why its a sucker scam (in as few words as possible)

Post by CedarWaxWing » Wed Nov 11, 2015 2:18 pm

Short and dirty :

*** The experience of buying whole life is analogous like playing Texas hold Em ..... with a professional player, lets call him Putin, who has a mainframe computer telling him what all the odds are of his hand winning at each step, while you are playing with a blindfold on, asking the the pro player to tell you what cards you have in your hand at each step of the way, which cards to play, and how much to bet, with a prearranged agreement that what ever you lose you will agree to pay annually for the rest of your life, except when you want to borrow the missed payment, at which time you will agree to pay interest (compounded) on that and/or any other missed payments until you pay it all back. ***


Long and detailed:

1. I agee in full with all of the prior posts.... and my less party oriented post is below.

2. My own experience: I bought both term and WL when I had 3 young boys. I did not have difficulties make the payments on each, and I always maxed out my retirement (taxed preferred) investments, and invested more in addition to that. ( Disclosure: I bought some whole life from a guy based on a referral from someone I trusted when I was young, ignorant, and there was no easy access to good sources of financial info on places like Bogleheads, or whitecoatinvestor, or Allan R., or Mike P., and many of the other people on this list who are so honest and generous with their experience and knowledge. )

Insurance pitch included claims of:

4% return, guaranteed... much higher returns were projected.... ... I Got 3.5 percent, as far as anyone can telln. ( It took over a year to get communication from the insurance company in regards to this... and they are were incommunicado in regards to why they appear to be in violation of their policy...and this is one of the more reputable insurance companies.)

Cheap loans of the cash value and the loan payments would go to my insurance policy to increase its returns for me personally.... the policy says the loan rate is 8 percent, and never less...and the interest does NOT go to my policy , but to the company.

The policy would be paid up one day so there would be no need to keep paying and the policy would be in effect forever there after at no further cost. This was presented as an estate planning benefit..... the policy says it is never paid up, and if payments are stopped without surrendering the policy, doing so constitutes an 8 % loan against the cash value...which compounds until the cash value is zero, and then the policy lapses.

The death benefit goes up to huge values as you keep paying.... It goes up very modestly, never coming close to the projected values.

"Call me anytime for questions"... In the last ten years not once have I been able to get a clear explanation from the insurance company or agent as to how they determine the annual payout in a given year or how much of my premium in a given year buys the insurance, and how much is "invested".... making it impossible to know for sure if the process is honest. It is certainly not visible. They claim this info is not determinable, but they really mean we refuse to show you what is behind the smoke and mirrors.

By my calculations and pretty good estimates..... it appears that if I had purchased only term insurance, and invested the difference in costs and gotten the returns that I did get on my taxable investments.... I would be ahead (financially better off) by about 340,000 dollars.

Was the insurance salesman honest?.... I think not, but it is possible that he simply did not understand his own product, except the part about what his huge commission. Selling whole life is like having a license to print money..... or more accurately, to steal money.


I have been making payments on this policy for years... and as a newly retired person am thinking of the best way relieve myself of this annual expense, Although I can afford to keep paying it, I see no logic in doing so, and i am beginning to think that the smartest thing to do at this time may be to either cash it in before collecting SS at age 70, making my boys the owners of the policy over time and letting them cash it in at a lower tax rate, or letting them decide if it should be continued (after about 22 years it might be worthwhile for them to do so), or getting a converting it to a variable rate annuity at Vanguard.

Or.... to give it to a charitable organization for its cash value.... but that only makes sense in a high tax year for me, i.e. to counter balance a year of converting a very large amount of t ira or 401 k funds to a roth. I think my tax guy will have to determine if this could make any sense financially. but it does sound like fun, in a sinister sort of way. ;)

No matter what i do at this time, it was not an optimal decision, and is now kind of like a thorn in my shoe of investment decisions...

Now... Please tell us what kind of party would you go to that would inspire you to post this question????

I am not sure I would want to go to such a party. :)

Mike O.

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Re: Whole Life. Can someone sum up why its a sucker scam (in as few words as possible)

Post by skepticalobserver » Wed Nov 11, 2015 2:45 pm

Also, the cost of insurance does not stay level over the life of the policy. That expense increases as the insured ages and eats into ROI (or what's left of it).

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Re: Whole Life. Can someone sum up why its a sucker scam (in as few words as possible)

Post by Raybo » Wed Nov 11, 2015 3:06 pm

1. Whole Life needs to be sold by a salesperson who has to be paid.

2. Life insurance is given special treatment in the tax code.

3. Both of these have to be paid for on top of whatever the death benefit is.
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Re: Whole Life. Can someone sum up why its a sucker scam (in as few words as possible)

Post by CedarWaxWing » Wed Nov 11, 2015 4:21 pm

Everyone who posted a response should be invited to the party, to give their own version to any interested guests. :sharebeer

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Re: Whole Life. Can someone sum up why its a sucker scam (in as few words as possible)

Post by mickeyd » Wed Nov 11, 2015 4:57 pm

(in as few words as possible)
Agent makes a lot. You pay a lot.
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Re: Whole Life. Can someone sum up why its a sucker scam (in as few words as possible)

Post by gtownsend » Wed Nov 11, 2015 5:23 pm

You're buying two things together that are much cheaper if bought separately.

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Re: Whole Life. Can someone sum up why its a sucker scam (in as few words as possible)

Post by Biffer » Wed Nov 11, 2015 5:33 pm

Through complexity, whole life is made to sound far better than it actually is.

(Be very, very clear on exactly what is "guaranteed".)

Edit to add PS: I don't think it's a "scam" -- just a bad investment for most people it's pitched to.
Last edited by Biffer on Thu Nov 12, 2015 5:37 pm, edited 4 times in total.

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Re: Whole Life. Can someone sum up why its a sucker scam (in as few words as possible)

Post by JupiterJones » Wed Nov 11, 2015 5:33 pm

You're paying too much for two poor products, plus you only really "get" one of them.

If you cash out the policy, the insurance company (obviously) keeps the insurance part.

If pass away first and your beneficiaries get the insurance payout, they don't get the investment part (the cash value). The insurance company keeps that for themselves.

Much better to buy term and invest the difference. If you die during the term, your heirs get the insurance payout and the full value of the investment (which will likely be higher than the equivalent cash value to boot!)
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Re: Whole Life. Can someone sum up why its a sucker scam (in as few words as possible)

Post by Plutus » Wed Nov 11, 2015 5:37 pm

If whole life were a 401k plan, all of the investment choices would have 3%+ expense ratios with large front-end load fees, your balance would not equal your contributions until year 15, and it wouldn't reach an amount that you could retire on until after you were dead.

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Re: Whole Life. Can someone sum up why its a sucker scam (in as few words as possible)

Post by rgs92 » Wed Nov 11, 2015 5:44 pm

I know a few middle aged women who bought (lots of) whole life insurance because they simply like the idea of having a lump sum coming their way if their husband dies at any age, however old. All the arguments about fees/alternative strategies/etc. fall on deaf ears if I mention them. It just seems to be a simple idea they find easy to grasp and I no longer even try to talk them out of it. They find the idea of term insurance terrible because they feel it is useless and that money paid as premiums along the way will be down the drain if they end up a widow late in life.
So how would you answer a woman with this outlook?
Last edited by rgs92 on Wed Nov 11, 2015 5:49 pm, edited 2 times in total.

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Re: Whole Life. Can someone sum up why its a sucker scam (in as few words as possible)

Post by Plutus » Wed Nov 11, 2015 5:48 pm

rgs92 wrote:I know a few middle aged women who bought whole life insurance because they simply like the idea of having a lump sum coming their way if their husband dies at any age. All the arguments about fees/alternative strategies/etc. fall on deaf ears if I mention it. It just seems to be a simple idea they like and find it easy to understand and I no longer even try to talk them out of it. They find the idea of term insurance terrible because they feel it is useless and money from premiums along the way down the drain if they end up a widow late in life.
So how would you answer a woman with this outlook?
I'd start a side business selling whole life policies and tell them to spread the word!

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Re: Whole Life. Can someone sum up why its a sucker scam (in as few words as possible)

Post by nisiprius » Wed Nov 11, 2015 6:24 pm

You're buying a complicated bundle of two or more things that have no logical reason at all to be bought as a package and are better bought separately.

They are a bad purchase in the same way and for the same reasons as buying a combination cold pill when you could a) buy the same medications separately for much less money, and b) treat only symptoms you actually have, instead of including medicines you don't need that can only do harm.

It is a "sucker scam" only in the sense of being sold a somewhat overpriced product that meets the seller's needs better than it meets your needs. You do receive something valuable, it just may not be what you need; and it may not be grossly overpriced, just slightly overpriced. Its not actually fraudulent. It does real harm if a person who could have afforded to buy enough term insurance ends up, instead, buying an inadequate amount of whole life insurance. It does even more harm if a person is induced to buy more whole life than they can afford and lets it lapse.

The worst thing about whole-life policies is that most of them pay a death benefit because the majority of policyholders let them lapse.
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Re: Whole Life. Can someone sum up why its a sucker scam (in as few words as possible)

Post by David Jay » Wed Nov 11, 2015 7:34 pm

Short version:

Whole life causes you pay more when you are young and asset-poor so that when you are asset-rich and don't need any insurance someone else (not you) will benefit from your death.

With term life, you buy the low-cost insurance to protect your loved ones when you are young. You end the coverage when your estate can take care of those needs [edit: and/or when those needs have passed - like kids are out of college].
Last edited by David Jay on Wed Nov 11, 2015 9:23 pm, edited 1 time in total.
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Re: Whole Life. Can someone sum up why its a sucker scam (in as few words as possible)

Post by Jack FFR1846 » Wed Nov 11, 2015 8:54 pm

The fees are outrageously high

The actual returns are outrageously low
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Re: Whole Life. Can someone sum up why its a sucker scam (in as few words as possible)

Post by rob » Wed Nov 11, 2015 8:56 pm

People working on commission love selling them.... do you think that's because they are helping you?
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Re: Whole Life. Can someone sum up why its a sucker scam (in as few words as possible)

Post by knpstr » Wed Nov 11, 2015 9:17 pm

The fees.
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Re: Whole Life. Can someone sum up why its a sucker scam (in as few words as possible)

Post by neurosphere » Wed Nov 11, 2015 9:40 pm

nisiprius wrote:You're buying a complicated bundle of two or more things that have no logical reason at all to be bought as a package and are better bought separately.

They are a bad purchase in the same way and for the same reasons as buying a combination cold pill when you could a) buy the same medications separately for much less money,
This is a good analogy. Whole life insurance may be compared to "Duexis".

Duexis is a pill that combines a very common and familiar medication (ibuprofen aka Motrin aka Advil) with a common antacid (famotidine aka pepsid).

One month supply of ibuprofen costs just a few dollars. One month supply of famotidine is just another few dollars more. But this "great new!" drug, Duexis combines the two medications in ONE PILL! and costs only $1500 per month. What a bargain! See this NY Times article (http://www.nytimes.com/2015/10/20/busin ... icing.html):
The pain reliever Duexis is a combination of two old drugs, the generic equivalents of Motrin and Pepcid.

If prescribed separately, the two drugs together would cost no more than $20 or $40 a month. By contrast, Duexis, which contains both in a single pill, costs about $1,500 a month.
In the clinical trials for which Duexis got approved, they compared people who needed a lot of ibuprofen on an ongoing basis (for example, people with arthritis) to those who took Duexis. Given that large continuous doses of ibuprofen can result in stomach bleeding, and antacids like famotidine/pepsid help prevent bleeding, is anyone surprised by the results? Here is the summary of the data which led to FDA approval of Duexis (http://www.centerwatch.com/drug-informa ... famotidine)
The subjects received either Duexis or ibuprofen (800 mg) three times a day for 24 consecutive weeks. In both trials, Duexis was associated with a statistically significantly reduction in the risk of developing upper gastrointestinal ulcers compared to taking ibuprofen only during the six month study period.
Note that the study did NOT compare Duexis to people asked to take ibuprofen and famotidine together, in SEPARATE pills.

Whole life is kinda like duexis. Yes, you might get some benefit from combining life insurance and investments in one package. And yes, perhaps doing so is better that either option alone. BUT, there is a HUGE fee which goes to the firm which is packaging these two items into one "pill". And what they don't tell you is that it's quite trivial to simply purchase the two "drugs" (e.g. life insurance and investments) on your own at a fraction of the price.

Whole life is a bad bad bad idea for 99.5% of the people it's pitched to. You don't need to pay "$1500/month" for whole life when you can pay "$5 + $5 = $10/month" for term life plus invest the difference. You'll come out WAY ahead in the latter case.

Thanks Nisi for the nice analogy.

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Re: Whole Life. Can someone sum up why its a sucker scam (in as few words as possible)

Post by Aptenodytes » Wed Nov 11, 2015 9:45 pm

rgs92 wrote:I know a few middle aged women who bought (lots of) whole life insurance because they simply like the idea of having a lump sum coming their way if their husband dies at any age, however old. All the arguments about fees/alternative strategies/etc. fall on deaf ears if I mention them. It just seems to be a simple idea they find easy to grasp and I no longer even try to talk them out of it. They find the idea of term insurance terrible because they feel it is useless and that money paid as premiums along the way will be down the drain if they end up a widow late in life.
So how would you answer a woman with this outlook?
it sounds like these people have thought the issue through. So it is unlikely that a conversation or two is going to change their mind. If you want to ease your conscience you could do something like mention, once, when the subject comes up, that you have read that whole life policies are a bad buy for consumers and that you'd be happy to share an article that explains why, if they want to read it. Only give them the article if they ask, and don't bring the topic up on your own again.

That's what I'd probably do.

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Re: Whole Life. Can someone sum up why its a sucker scam (in as few words as possible)

Post by nisiprius » Wed Nov 11, 2015 10:03 pm

There's always argument from authority. Can anybody find anyone who recommends whole life outside of the insurance industry? I never have. Every disinterested source I've ever read has recommended against it--Consumer Reports; Andrew Tobias; Michelle Singletary; etc.
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Re: Whole Life. Can someone sum up why its a sucker scam (in as few words as possible)

Post by pkcrafter » Wed Nov 11, 2015 10:17 pm

At a party, I want to be able to explain in under 20 seconds why it's bad investing.
Whole Life. Can someone sum up why its a sucker scam like extended service coverage (in as few words as possible).
Please tell us an insurance salesman is going to be there. :happy

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Re: Whole Life. Can someone sum up why its a sucker scam (in as few words as possible)

Post by goldendad » Wed Nov 11, 2015 10:47 pm

The rate of return is not very good and you have no idea what your future insurance needs will be. I have used term all my life. It has worked out very well. I am currently on a 20 yr fixed term policy.

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Re: Whole Life. Can someone sum up why its a sucker scam (in as few words as possible)

Post by Dandy » Thu Nov 12, 2015 9:27 am

:happy Was the relatively recent study that compared buy term vs whole life paid up at 65 - and seemed to show a whole life benefit ever peer reviewed? I believe it was by Pfau . Whole life is generally a bad move but I thought he made some interesting points.

My career was with an insurance company, brokerage company and dealt with mutual funds. Didn't sell. My observations were that the insurance people were generally ignorant of investments, the investment people were generally ignorant of insurance. The active fund people hated indexers and the indexers hated active managers. There was not much thoughtful exchange of information going on. The other side's points were dismissed.

I saw some of this in Pfau's boglehead post asking for comments. e.g. People commenting without reading the article/paper. Claiming it wasn't valid because whole life would lapse (but ignoring that "invest the difference" might not be followed).

I think people have developed a knee jerk reaction to whole life, with justification, that prevents any suggestion of possible value.

I bought a small whole life paid up at 65 policy before I really knew about investments and I also later bought term. Was it a great buy - can't say that - but it wasn't a horrible choice. Dividends reduced the premiums, especially later on. It now pays a tax free dividend of about 2% of face value and probably 3+% of the total premiums I actually paid. It will do that or probably better for the next 20 years if I live to the average life expectancy. It will pass on tax free the face value to my spouse or heirs. If it is my wife she can bury me or buy an annuity with the face amount. OR take a nice vacation :happy

My point is let's be very wary of whole life but be open to possible advantages especially when it has been in force for many years.

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Re: Whole Life. Can someone sum up why its a sucker scam (in as few words as possible)

Post by White Coat Investor » Thu Nov 12, 2015 10:55 am

Dandy wrote:
I bought a small whole life paid up at 65 policy before I really knew about investments and I also later bought term. Was it a great buy - can't say that - but it wasn't a horrible choice. Dividends reduced the premiums, especially later on. It now pays a tax free dividend of about 2% of face value and probably 3+% of the total premiums I actually paid. It will do that or probably better for the next 20 years if I live to the average life expectancy. It will pass on tax free the face value to my spouse or heirs. If it is my wife she can bury me or buy an annuity with the face amount. OR take a nice vacation :happy
The issue is that's about as good as it gets. It's never awesome. If you do a good job buying, and hold on to it until death, you get mehhh returns. If you get sold something you didn't really want in the first place, it gets a lot worse. Here's an email I got this week I get 3 or 4 similar ones every week):
I wonder if I could speak with you directly. I have invested huge
amounts of money in permanent life insurance and I can no longer keep
up with the payments . I would love to know what my options are and if
I should surrender and loose everything as opposed to keep investing .
My policies are 2-5 years old.
My husband is a physician , I worked at an insurance company for 2.5 years and I
thought it was a good investment now based on your blog I have second
thoughts . Thanks!
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Re: Whole Life. Can someone sum up why its a sucker scam (in as few words as possible)

Post by Dandy » Thu Nov 12, 2015 11:46 am

The issue is that's about as good as it gets. It's never awesome. If you do a good job buying, and hold on to it until death, you get mehhh returns. If you get sold something you didn't really want in the first place, it gets a lot worse.
True, but many savings type products don't have awesome upsides especially ones with this degree of safety. Traditional whole life isn't an investment product although it is often miss sold or mischaracterized as such. It is more akin to a savings product.

Also, the mehh returns miss some of the point of passing something of value tax free to spouse or heirs and tax free dividends till you die. Some would add the cash/loan value acts as a source of emergency funds - but if you really need the insurance that would be a
bad idea

All I'm saying is that it has much more downside than those who sell them admit and a bit more upside than those who have a knee jerk rejection at the mention of the product may fully understand/appreciate.

In Pfau's paper I thought he raised interesting benefits of whole life and annuities possibly creating more retirement income than the traditional buy term and invest the difference guideline - which I suspect was created by a broker -- certainly not an insurance agent.

As I recall there was a lot of focus on cost assumptions for the investment side - i.e. Bogleheads would easily beat those average investment costs, even no respected investment person recommends whole life. He was trying to break new ground - did anyone run the numbers with lower expense investments or did we just settle for whole life is no good and move on. I don't have the expertise to
run the numbers properly. That is why I asked if his paper had been peer reviewed.

While I understand the Pfau paper might have been funded by the insurance company/s which raised objectivity concerns - Pfau is usually considered a "good guy" by most Bogleheads. That's why peer review is needed. We get so many questions about retirees needing more income and should they get CDs or dividend paying stocks etc. But a new concept seemed to get little serious consideration.

I'm not interested in personally implementing his idea - just thought it was intellectually challenging.

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Re: Whole Life. Can someone sum up why its a sucker scam (in as few words as possible)

Post by ubermax » Thu Nov 12, 2015 12:09 pm

ObliviousInvestor wrote:This is an oversimplification, but here goes:

It is life insurance, coupled with a safe but very low-return investment. For most people, it makes sense to separate those decisions: buy term life insurance (which costs quite a bit less), then invest in whatever way is a good fit for their needs.

But when you buy term life insurance and take your investment capital elsewhere (e.g., Vanguard) the insurance agent makes a much smaller commission.

If you haven't read EmergDoc's series on the topic, I highly recommend it:
http://whitecoatinvestor.com/debunking- ... insurance/
+1 Sums it up pretty good in my opinion , term insurance is pure insurance , no cash value buildup .

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Re: Whole Life. Can someone sum up why its a sucker scam (in as few words as possible)

Post by pshonore » Thu Nov 12, 2015 12:10 pm

Interesting article about lapse rates
http://theinsuranceproblog.com/whole-li ... pse-rates/

Really surprising to see that that only about 1% of term policies actually pay a claim. But maybe that's a good thing.

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Re: Whole Life. Can someone sum up why its a sucker scam (in as few words as possible)

Post by Matt48Ritchie » Thu Nov 12, 2015 12:58 pm

It's a sucker scam because the only people who think they are worthwhile are the people selling them, their family members, or the unfortunate policyholders they've managed to brainwash.

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Re: Whole Life. Can someone sum up why its a sucker scam (in as few words as possible)

Post by TimeToThink » Thu Nov 12, 2015 1:22 pm

For the OP.

Nine years ago my wife received a whole life policy from her folks. I recall I wanted to determine what it was earning on the investment part of it. Mind you, I have an accounting degree, and it took me quite a bit of time and effort via my spreadsheet to accurately separate the investment portion from the insurance portion of the policy from all the jazz that was put into it. I'll spare you the gory details which, by the way, I still have. At the end of the day I figured the investment portion was earning about 3.5% and the premium, if I remember correctly, was about $200 or $300 a year for $50K insurance. I told my wife it was best to reinvest the earnings on the policy elsewhere if she was comfortable ditching the insurance part of it. She said ok, so we closed the policy. Too bad my wife had other plans for the money other than investing it. That said, it was well spent.

So, as others have voiced in this post, buy a term policy and invest separately.
Last edited by TimeToThink on Thu Nov 12, 2015 1:38 pm, edited 2 times in total.

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Re: Whole Life. Can someone sum up why its a sucker scam (in as few words as possible)

Post by hnzw rui » Thu Nov 12, 2015 1:34 pm

My aunt's husband worked as an insurance agent for a time. Rather than getting whole life, he and my aunt bought term and invested the difference in mutual funds. :)

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Re: Whole Life. Can someone sum up why its a sucker scam (in as few words as possible)

Post by Meg77 » Thu Nov 12, 2015 1:40 pm

JupiterJones wrote:You're paying too much for two poor products, plus you only really "get" one of them.

If you cash out the policy, the insurance company (obviously) keeps the insurance part.

If pass away first and your beneficiaries get the insurance payout, they don't get the investment part (the cash value). The insurance company keeps that for themselves.

Much better to buy term and invest the difference. If you die during the term, your heirs get the insurance payout and the full value of the investment (which will likely be higher than the equivalent cash value to boot!)
This. I thought whole life was a bad idea just because of the above average fees and below average returns, but I recently found out that the cash value portion evaporates when you die and isn't passed to heirs on top of everything! This boggles my mind. I wonder how many people who have these policies realize that...
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Re: Whole Life. Can someone sum up why its a sucker scam (in as few words as possible)

Post by Dandy » Thu Nov 12, 2015 2:16 pm

Whole Life can be hard to understand. That is why it is sold or most times oversold. Yes there are greater commissions than if you were sold the same face value in term insurance. That is an incentive for agents to push whole life or life products other than term. I hear all the usual objections and generally agree.

What I don't see is an expert unbiased review of Pfau's paper which seemed to show significant income advantages to a married couple vs the normal buy term and invest the difference. Railing against whole life is pretty easy and simple. What is harder is to validate or invalidate in a unbiased way -- his paper. If his idea has any merit it could be significant for some people. He is usually not someone to be taken lightly.

Anyway, don't stop the railing and ranting it can help people avoid getting sold something they might not need.

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Re: Whole Life. Can someone sum up why its a sucker scam (in as few words as possible)

Post by mickeyd » Thu Nov 12, 2015 3:00 pm

All the arguments about fees/alternative strategies/etc. fall on deaf ears if I mention them.
That's enough to make a grown insurance agent giddy.
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Re: Whole Life. Can someone sum up why its a sucker scam (in as few words as possible)

Post by pshonore » Thu Nov 12, 2015 3:06 pm

Meg77 wrote:
JupiterJones wrote:You're paying too much for two poor products, plus you only really "get" one of them.

If you cash out the policy, the insurance company (obviously) keeps the insurance part.

If pass away first and your beneficiaries get the insurance payout, they don't get the investment part (the cash value). The insurance company keeps that for themselves.

Much better to buy term and invest the difference. If you die during the term, your heirs get the insurance payout and the full value of the investment (which will likely be higher than the equivalent cash value to boot!)
This. I thought whole life was a bad idea just because of the above average fees and below average returns, but I recently found out that the cash value portion evaporates when you die and isn't passed to heirs on top of everything! This boggles my mind. I wonder how many people who have these policies realize that...
That would depend on the particular policy. For Universal Life there is an option usually to make the death benefit equal to the stated amount OR the sum of the cash value added to the stated amount. The latter is more expensive since the death benefit is obviously greater. Perhaps one of the experts can tell us if this is an option for plain old Whole life?

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Re: Whole Life. Can someone sum up why its a sucker scam (in as few words as possible)

Post by White Coat Investor » Thu Nov 12, 2015 3:31 pm

Dandy wrote:Whole Life can be hard to understand. That is why it is sold or most times oversold. Yes there are greater commissions than if you were sold the same face value in term insurance. That is an incentive for agents to push whole life or life products other than term. I hear all the usual objections and generally agree.

What I don't see is an expert unbiased review of Pfau's paper which seemed to show significant income advantages to a married couple vs the normal buy term and invest the difference. Railing against whole life is pretty easy and simple. What is harder is to validate or invalidate in a unbiased way -- his paper. If his idea has any merit it could be significant for some people. He is usually not someone to be taken lightly.

Anyway, don't stop the railing and ranting it can help people avoid getting sold something they might not need.
You can start with the fact that he included average mutual fund ERs and advisory fees- i.e. subtract 2% from the returns of the investments.

Sure, if you assume the investments are terrible than whole life looks pretty good!
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