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

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

Post by GoldenFinch » Thu Nov 12, 2015 5:37 pm

They make money and you can do better. (Eight words.)

Dandy
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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 5:45 pm

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.
Actually I think it was a bit less than 2% say 1.59% as I recall but point taken. Thanks, but not the rigorous analysis I was looking for but it may not be needed:

He has stated that low or even zero expenses would reduce the advantage of the whole life plus annuity plan but not eliminate it in most? cases. On the Boglehead forum he stated he would post the results of using low investment costs -- but it was not posted to that specific post. I couldn't find it on his blog. So, maybe the investment cost issue was more of a deal breaker than he thought or maybe he felt it was a waste of time to try to convince such a tough audience.

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David Jay
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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 » Thu Nov 12, 2015 7:26 pm

EmergDoc wrote:
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!
+1
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RandomPointer
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Re: Whole Life. Can someone sum up why its a sucker scam (in as few words as possible)

Post by RandomPointer » Thu Nov 12, 2015 8:50 pm

I got an offer about index universal life insurance. I do not think that is a scam, but for vast majority of the population, it is not good.

The selling point was, get the return of the market, without the downside.

My argument: 'Do you believe that in order to get a better return, you need to take more risk? If whole life insurance is too good to be true, do you think it is?'

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White Coat Investor
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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 » Fri Nov 13, 2015 9:16 am

Dandy wrote:
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.
Actually I think it was a bit less than 2% say 1.59% as I recall but point taken. Thanks, but not the rigorous analysis I was looking for but it may not be needed:

He has stated that low or even zero expenses would reduce the advantage of the whole life plus annuity plan but not eliminate it in most? cases. On the Boglehead forum he stated he would post the results of using low investment costs -- but it was not posted to that specific post. I couldn't find it on his blog. So, maybe the investment cost issue was more of a deal breaker than he thought or maybe he felt it was a waste of time to try to convince such a tough audience.
I could never get a good explanation (from him or anyone else knowledgeable on the subject) of what whole life offered that a SPIA did not.

I have a suspicion why he didn't post the "results" using low investment costs. It seems it would only take 5 minutes to change a variable or two in a spreadsheet, so it can't be a time issue, right?

Pfau is also a bit of a pessimist on future returns in most of his work. So when I read work from someone expecting very low returns from investments in the future, I expect results like he got. Will future returns be low? I have no idea. But if they're not I assure you that those who bought whole life instead of traditional investments are going to regret it!
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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

Post by Independent » Wed Nov 18, 2015 10:34 am

EmergDoc wrote:
Dandy wrote:
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.
Actually I think it was a bit less than 2% say 1.59% as I recall but point taken. Thanks, but not the rigorous analysis I was looking for but it may not be needed:

He has stated that low or even zero expenses would reduce the advantage of the whole life plus annuity plan but not eliminate it in most? cases. On the Boglehead forum he stated he would post the results of using low investment costs -- but it was not posted to that specific post. I couldn't find it on his blog. So, maybe the investment cost issue was more of a deal breaker than he thought or maybe he felt it was a waste of time to try to convince such a tough audience.
I could never get a good explanation (from him or anyone else knowledgeable on the subject) of what whole life offered that a SPIA did not.

I have a suspicion why he didn't post the "results" using low investment costs. It seems it would only take 5 minutes to change a variable or two in a spreadsheet, so it can't be a time issue, right?
+1

There were other issues, I think I posted some questions there which he did not try to address. His WL strategy gave dramatically different results depending on whether the wife or the husband died first. He assumed the wife would die first. Why would anyone want that type of plan?

Also, he seemed to intentionally create an apples-to-oranges comparison regarding the amount of SPIA purchased. He could have picked equal monthly benefits for his term vs. WL comparison, but that would have made the term look better.

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mickeyd
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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 18, 2015 2:30 pm

OP was probably on a fishing trip and did not like the honesty that he caught here.
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CMLAW1
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Re: Whole Life. Can someone sum up why its a sucker scam (in as few words as possible)

Post by CMLAW1 » Wed Nov 18, 2015 6:23 pm

"I am extremely proud to share that The Guardians Board of Directors recently approved an $836 million dividend allocation to its individual life policy holders in 2016. The amount, which is 6.6% greater than last year's allocation, is the highest in our Company's history. The Dividend Interest Rate, which is the investment component of the dividend, will be 6.05% in 2016. Guardian is proud to be able to maintain the 6.05% DIR in this prevailing low interest environment.
If you are not currently a Whole Life Insurance policyholder with me and The Guardian, ask me how I can help you add this promised back asset to your portfolio and strengthen your overall financial plan for you and your family."

A friend who has tried to get me to invest in whole life (never will) has just recently sent me this. 'May be a silly question, but What does this mean?

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

Post by Boglegrappler » Wed Nov 18, 2015 6:48 pm

The fees are too high.

The product is complicated.

It is so complicated that I defy anyone to explain what price they are paying for the life insurance component, and what investment return they are getting. You will not be able to do it.

When you are young, when life insurance is most important and needed, term insurance is the most affordable, and gives you the best chance of getting the protection that you actually need. Whole life confuses this decision. You won't be able to "afford" enough whole life to properly protect yourself.

Buy term. Its cheap and you can afford to insure your child-raising spouse, which is very 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 Independent » Wed Nov 18, 2015 8:06 pm

CMLAW1 wrote:"I am extremely proud to share that The Guardians Board of Directors recently approved an $836 million dividend allocation to its individual life policy holders in 2016. The amount, which is 6.6% greater than last year's allocation, is the highest in our Company's history. The Dividend Interest Rate, which is the investment component of the dividend, will be 6.05% in 2016. Guardian is proud to be able to maintain the 6.05% DIR in this prevailing low interest environment.
If you are not currently a Whole Life Insurance policyholder with me and The Guardian, ask me how I can help you add this promised back asset to your portfolio and strengthen your overall financial plan for you and your family."

A friend who has tried to get me to invest in whole life (never will) has just recently sent me this. 'May be a silly question, but What does this mean?
Since you asked .... Let:
CVB = cash value at the beginning of a policy year
CVE = cash value at the end of that policy year
P = gross premium
E = expenses
i = an interest rate
D = cost of death claims paid (excess of face amount over cash value, times a mortality rate, or D = q x (FA - CVE))

Then
CVE = (CVB + P - E) x (1 + i) - D

A whole life policy has a table of guaranteed cash values. You can derive each one from the prior if you know the assumptions for E, i, and q. The i and q may be disclosed in the policy.

When the policy is issued, a mutual company will make "conservative" assumptions, they hope/expect that actual experience over time will give them a higher i, lower q, and possibly lower E. Call those items i', q', and E'.

Then, they will get CVE' = (CVB + P - E') x (1 + i') - D'
In this case CVE' > CVE. The excess is extra money that can be returned to the policyowner. It is called a "dividend", but legally is is a non-taxable "return of excess premium".

Your quote says that Guardian is using i' = 6.05% for this year's dividend scale.

--------
I've used "cash value" because that's a familiar term. In fact, this math is done with "reserves". Cash values tend to be lower than reserves in the early policy years, but equal in the later years. The difference is one of the reasons you don't want to buy whole life if you think you might quit "early".

Companies also do this math for level premium term insurance. Buyers rarely see it, because reserves are small enough that companies don't feel forced to convert them into cash values. But, you may see it on term policies issued with long level periods at high ages.

I've simplified the formula by assuming all premiums and expenses occur at the beginning of the year, and all claims are paid at the end.

They also do this math on Universal Life policies, but they do it monthly and actually disclose the factors.

The 6.05% is not what the company is earning on new bonds that it bought this year. It's the average on all bonds in its portfolio. If it is currently buying bonds with lower yields, the Dividend Interest Rate will go down over time. (One of the complaints about Pfau's WL analysis is that he assumed the current DIR will remain where it is, in the face of low interest rates.)

Given all the above, very few people have the tools to compare whole life contracts.
IMO, you've made the right decision to stick with term. That's what I did.

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White Coat Investor
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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 19, 2015 12:29 am

CMLAW1 wrote:"I am extremely proud to share that The Guardians Board of Directors recently approved an $836 million dividend allocation to its individual life policy holders in 2016. The amount, which is 6.6% greater than last year's allocation, is the highest in our Company's history. The Dividend Interest Rate, which is the investment component of the dividend, will be 6.05% in 2016. Guardian is proud to be able to maintain the 6.05% DIR in this prevailing low interest environment.
If you are not currently a Whole Life Insurance policyholder with me and The Guardian, ask me how I can help you add this promised back asset to your portfolio and strengthen your overall financial plan for you and your family."

A friend who has tried to get me to invest in whole life (never will) has just recently sent me this. 'May be a silly question, but What does this mean?
It means he wants to sell you a whole life policy and that the dividend on the cash value of Guardian policies was 6.05% this year. Remember, of course, that the dividend rate is not your rate of return.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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