Amateurs…Why I Love to Hate Them

Note: This one took some time and I'm a few days past my normal
schedule.  It seemed necessary.

So I've known about this guy who is apparently an emergency room physician who got burned some years ago by an NML agent who did what a lot of career agents do (promise someone the sun, the moon, and the stars, and fail miserably to deliver).  I've not made this comment publicly here until now, but I've long believed that usually the only difference between Primerica agents and the rest of the career guys and gals is the name of the company on their business cards.  They all love to dream up these great strategies, but once the hammer drops on the part they care most about, they're off to the next one.

My original decision on this individual was to simply leave him be.  Let him do his thing and pay him no attention (despite the frequent requests I get from people asking what I think about his stuff).   But, he recently put together a piece with a truck-load of inaccuracies.  I don't care if you want to go against my advice, or think you can build a better mouse trap, but I start to get a tad irritated when someone wants to build the illusion of being an informed resource for personal finance, who has enough time to write about it, but apparently doesn't have enough time to fact check.

(I've removed the link at this time, because I've decided not to promote this crap)

We're Going to take this one Line by Line

I'm going to be nice here (as much as possible).  I have a certain empathy for this guy, as it pisses me off (sometimes more than the individual client) when career agents do what I've gathered happened to him.  Additionally, I'm going to assume that based on his background, he doesn't even know where to begin to really research this stuff (I didn't when I first entered the industry).  So, my big advantage duly noted (and a big fun discussion on how he's fallen prey to the availability heuristic big time when it comes to his view on life insurance agents and the industry aside) we'll take it point by point.

1. It Costs Too Much

The very first sentence of this paragraph is false.  His claim that insurance (whole life insurance) is never bought it's sold is incorrect.  My phone rings a couple times a week from people who happen upon me and call asking for more information and a good number of those end up in a purchase.  Additionally, I was recently introduced to a guy doing the same thing, and receiving the same results as I.  People buy this stuff everyday.

The idea that agents put all the focus on the so called “investment” portion and keep the focus off the insurance component and its “cost” is weird.  This sounds more like a personal experience than actual evidence.  Perhaps it's just a really poor choice of words on his behalf.  Personally, my interest isn't really in what someone buys (i.e. what company or what product) it's that they choose to buy from me.  However, I'm not a career insurance agent (i.e. I don't work for a specific company) so I have the luxury of not caring.  I can't help that feel his comments are motivated by emotional self experience.  Still, there's no real way to prove or disprove this point.  Making it a useless point for him to have made in the first place.

On top of this, the comment about insurance companies pricing out the insurance for as much as they can get away with is extremely misleading and either a sign of dis-ingenuity or a true novice.  Insurance premiums are regulated by state insurance departments.  It's true that there is a range within which they can be, but there is an auditing process where the insurance company has to justify the product pricing based on actuarial assumptions, which has to be agreeable by each state insurance department in which state the insurance company wants to sell their product.  The allusion that insurance companies can charge whatever “they can get away with” and “jack up the price” is simply incorrect.

2. The Fees are Too High

The hypothetical commissions are way off base.  All of my term contracts pay the same or more as my whole life contracts as a percentage of first year premium.  In fact, term has been a highly coveted form of insurance to sell for many years for two big reasons:

1. It paid a higher percentage in commissions on first year premiums, and the old insurance process for selling insurance was to point out the need and get a premium commitment from someone (how much they wanted to pay) and then figure out how much insurance they could buy with that commitment.  Term was a favorite because it could offer more insurance coverage (although for a shorter time period) and it paid better based on their commitment.
2. Term rarely stays in-force.  It gets sold, and then resold a lot.  When it gets resold, it's a whole new policy, with a brand new first year commission paid.

The notion that insurance agents sell whole life insurance and then try to “upgrade at every opportunity” (whatever in the hell that means) is pure fiction.  The industry would fall apart if this were true, and none of them would be able to boast the lapse ratios they do (NML happens to have a really good one, actually).

3. You Don't Need a Middleman…

I'd hate to burst this guys bubble, but unless you are buying hard assets and holding onto them personally, you need a middleman for every investment you make.   In fact, I'm guessing he (like most everyone including the anchors on CNBC) barely knows just how many people are involved behind a single investment transaction (hint, it's a lot more than 2 and those people all have to get paid somehow).

As someone who has personally held FINRA registrations and has personally transacted investment business I speak from experience when I say insurance doesn't even begin to match the complexity of stocks, bonds, mutual funds, etc. when it comes to the so called “middlemen” involved.

Now, speaking to the issue of getting a better return not paying someone else I'd like to spin off into a brief lesson about scalability.  Without getting too technical, scalability is the idea of being able to produce more when you have more resources, it's the fundamental idea that gets mutual funds off the ground (they can achieve better returns than you alone because they have more money and more resources).  The same notion is true inside a life insurance policy.  You get to take advantage of the companies' investment returns, and business profitability.  The juxtaposition of the options of investing alone or with a company that “takes off the top” is another sign of dis-ingenuity and/or a lack of knowledge on the topic.

4. Complexity

I actually like this point.  Not because I agree it's a reason to not own whole life insurance, but because less complexity is a good goal when choosing a life insurance contract.  This point was really light and pretty much opinion rather than fact (even more so than the other points, which is saying a lot).  There's no explanation on how complex products have hurt people, no evidence to support the claim.  It seems like maybe he had more hopes for this point, but ran out of time and just made something up (I understand, I've caught myself doing it from time to time, I generally edit that sort of thing out, though).

5. I'm REALLY Impatient

Ok, that heading might have been uncalled for.  But this one was the biggest WTF moment for me.  He admits this does “work” (I'm not really sure what his working definition of “works” is, but based on the assumed tone it's a positive notion).  Then he claims the problem, though, is that is doesn't work fast enough (personal re-framing of terminology writers prerogative employed).  These sorts of comments always leave me wondering if people truly understand the meaning of different asset classes.

I'm not really sure that is truly does take a long time to work.  Paid-up additions will yield a positive return generally after year 1.  And we know money can be accessed whenever without losing the payment of dividends.  He then goes on to caution everyone who has had a policy for more than 10 years to think twice about cashing it in.  If buying term and investing the difference is truly a magic bullet to prosperity, then there should be no problem for a healthy (i.e. insurable) individual to roll their whole life cash value into an investment portfolio, buy some term insurance, and begin dollar cost averaging that expensive whole life premium into their newly formed investment portfolio…unless of course it doesn't really work.  And perhaps it is true what they say: this whole life stuff actually does do some pretty impressive things.

The stuff about money already put into the policy and the negative net return being a reason to hold off on cashing in is a huge violation of a widely excepted (perhaps we'll say foundational even) Economic axiom (now I'm just being hyperbolic) concerning sunk costs.  You can't make decisions based on money you don't have, anymore.

Now I'm going to get really dorky for a second or two (hold onto your pants).

The lack of linearity is where my beef lies on this.  If a strategy like BTID truly is better, it ought not matter the time frame.  If Whole Life Insurance is worth owning once you've had it for 10 years, then it's worth it in the beginning as well.  The choice to purchase is what Economists frequently refer to as an inter-temporal  choice.  Meaning the payoff of the purchase isn't necessarily immediate and the buyer needs to weigh the value of payoff at different time intervals.  People make decisions (based on Consumer Choice Theory) by weighing the payoffs and choosing the one that yields the highest amount of utility (in this case economic benefit, which might prove a concept a little above the heads of some, so instead we'll lazily swap for rate of return instead–just stick with me for a minute).

Now, let's make it really simple and think of a world where there are only two options Whole Life Insurance, or BTID.  If one wants to make the claim that after 10 years (we'll use his numbers) it is not a good idea to renege on your strategy and switch from Whole Life Insurance to BTID, then inter-temporally speaking, it makes perfect sense to choose Whole Life Insurance from the beginning if you expect to be a going concern in 10+ years.  Logically (and mathematically) this makes perfect sense.  However, emotionally, this doesn't always make sense (and this is where marketing professionals have room to thrive).  If the guys digging ditches and selling insurance part time for Primerica can wrap their heads around this, I suspect a group of “highly educated busy professionals” can, too.

6. Actual Results May Vary

This is another point that seemed like maybe there could have been more planned, but he never got to it.  He makes some pretty bold claims like you'll be closer to the guaranteed amount than the projected amount.  I've written several policies that have outperformed the projected amount in year 1, say nothing about where they are, now (hint closer, by which I really mean above, the projected value).

7. Now I'm really going to tell you what I don't know.

Stocks, bonds, and mutual funds can generally be cashed out any day the market is open. You can change investments or use the money for living expenses without much hassle.

That's a direct quote, and it's painfully apparent this guy has never held a FINRA registration.  If I made this sort of claim, FINRA would fine me.  Why?  Because stocks, bonds, and most mutual funds are not deemed suitable investments for someone with a short investment time horizon and making claims about liquidity like this implies suitability for such an investment time horizon.

And just when I thought I understood just how light his understanding was, he made this comment:

 Heaven forbid the policy collapses on you and then you have to pay back all the money you’ve borrowed. Not a good thing when you’re obviously short of cash (or else why would you be borrowing the cash value in the first place.)

Um, no.  Simply no.  The cash value in a policy is collateral for the loan.  If the loan becomes larger than the cash surrender value (CSV) of the policy and you do not pay it down to make CSV > outstanding loan the insurance company will lapse the policy.  You don't owe the insurance company anything, they take the cash.  This is why the insurance company isn't going to let you lend out more than the CSV of the policy.  Now if you're wondering what cash you got out of the deal, you got the loan, which you spent.

Further, the giving up of liquidity bit is just wrong.  Money in a life policy is accessible anytime for any reason.  Sure not everything you pay in base premium is available immediately, but PUA's are.  The idea that putting money into whole life insurance locks it up for half an eternity is false.  Additionally, if I want to sell the stocks in my portfolio and use them for an emergency, I have to pay a brokerage commission to do that, and when I put it back and buy the stock again I also have to pay one then.  The only way around this is to pay a recurring management fee which is a percentage of my assets held in the account (I don't trade very frequently so I opt for door number 1).  When you repay a loan, there's no fee, when you take money out, there's no fee.  The insurance company doesn't charge you an annual maintenance fee on a Whole Life contract.  The money is accessible as soon as there is CSV, and you get it either by calling your agent or by calling the insurance company.  The check arrives in a few business days or can be sent EFT if you prefer (there sometimes is a fee for EFT, like there is everywhere else).

8. I said 8 and I'm sticking with It…no matter how senseless this last one is

Apparently if you put after tax dollars into an investment the money should be accessible tax free.  Of course, this isn't the way it works with a savings accounts, certificate of deposits, general brokerage accounts (individual, joint, etc.), and non-deductible IRAs (to name a few other options), but facts aren't necessarily important when your trying to make a point I suppose.

I'll correct his inaccurate and potentially dangerous statement about estate taxes.  First concerning life insurance proceeds, they are not estate tax free.  Income tax free yes, but estate tax free no.  Life insurance proceeds owned by the deceased are include-able in the gross estate.  In order to remove life insurance proceeds from ones gross estate, the individual cannot own or have direct influence over the policy and if this individual is providing the money used to pay the premiums, the money to pay for premiums must be gifted to purchase life insurance on the individual and this gift must not be a gift of future interest.  This is most commonly achieved by using an Irrevocable Life Insurance Trust.

Now concerning the $10 million dollar mark mentioned.  This is sort of true.  Everyone has a $5 million dollar estate tax exemption.  So, he's adding husband and wife's individual exemptions together.  And that's fine…if assets are spread/owned in a way to take advantage of this.  Here's what I mean.  If husband has 5 million dollars in his possession (or more) and wife has the same (or less) and husband dies, an estate would need to be opened and probated in order to take advantage of the exclusion.  Sounds intuitive and straight forward, but it's not as ubiquitously practiced as you might think.  Instead, a lot of times, people take advantage of spousal transfer and never open the estate.  Meaning wife now has $10 million in assets and will only be able to exclude five.  Additionally, this discussion is pertinent to the Federal Estate Tax only.  State level Estate Taxes have very different exclusions (a lot less in most cases) here's a list to check yours.

I will say that he is correct in pointing out that there are other ways to handle estate taxes besides buying life insurance to pay for it.  The determination on which strategy is best for you is dependent on a lot of personalized advice from more than just an insurance or financial person (a good tax and/or estate planning attorney is also a minimum requirement).  The vast majority, however, use life insurance when there is a possible Estate Tax liability.  Very few people waste time trying to fight against it's use, here.  I'll give him credit in pointing out that he reneged on this a bit in his reasons to consider it by going back to this topic.

Final Thoughts

Whole Life insurance is not the answer to everything.  But it is a real financial tool that can be counted as an asset, and it's a pretty good one at that.  Like all things, there can be good contracts and bad contracts (or perhaps more appropriately stated, the wrong contract can be paired up with the wrong client).  This happens everywhere, not just in the insurance world.  Medical professionals make mistakes and aren't always upstanding individuals themselves.  Heck Ian Ayres pointed out that Google has a better chance of correctly diagnosing an aliment than a human doctor, but that's doesn't mean I'm going to hit the I'm Feeling Lucky button if I should become really sick.

If you buy a GE washer and it turns out to be a lemon, that doesn't mean that all GE washers are bad.  If you neighbor then tells you that he too had a GE washer that was a lemon, it still doesn't mean all GE washers are bad.  You don't possess nearly enough data to make that claim based on your personal experience and what your neighbor told you.  The same is true with personal finance.  However, people tend to make these sorts of assumptions.  It's a wonderful example of what Daniel Kahneman and Amos Tversky call the availability heuristic.  It's easy to fall prey to as humans are not usually natural empiricists.

Please understand that I am not myself immune to this notion.  Though I have loads more information and statistics on the topic to support my claims.  My sample size is admittedly small, as well.  This is why I steer clear of bolder claims and strong assumptions.  It's also why I tend not to incontrovertibly claim any one asset class as worthless.

It's unfortunate to note that the original post compelled my response more out of a desire to correct false claims and inaccuracies, rather than spur a retort of a well studied and cerebral case against the use of whole life insurance.  Maybe one day someone will come along who is as interested in being right about this as I am, but will represent the other side of the coin.  Someone who could actually present a factual  case for the other side.  That doesn't appear to be the White Coat Investor.  Though he may claim that his advice is very dialed into a specific group of people, and that this group is an unsuitable group for this sort of product, I know he's wrong, and I've have several posts on this blog to support my claims (not to mention a good supply of clients who fit his profile for target audience who are doing just fine with this product).