I want to start today’s discussion about whole life insurance and Roth IRA’s by noting that I had mixed feelings about writing this post. This one was motivated by requests to retort a blog post that showed up on a certain ER Doc turned part-time financial guru’s web site when he posted several reasons why whole life insurance and Roth IRA’s are not similar.
Here’s the problem for those who have made the request that I “take him on.” I don’t disagree with him.
Seemingly at issue with many of you is the fact that some of the eight points used to substantiate his claim are a little inaccurate in terms of true functionality. No it’s not technically correct that one must always take a policy loan when taking money out of a whole life contract and yes one could argue that technically speaking prior to age 59.5 distributions from a Roth IRA and whole life insurance are very similar. Both use the First-in First-out (FIFO) distribution method for accounting so as long as you aren’t pulling out anything beyond your basis there is no taxable event.
Additionally his portrayal as loans as a bad thing is a little too dismissive and indicates lack of familiarity with the subject. He’s formally educated in medicine not finance and the fact that he can at least bring up a couple of good points and understands things enough to make the claim puts him ahead of many financial/insurance practitioners who could care less about what they don’t know despite the fact that they should know it.
But just because not everything used to justify his points is 100% accurate in terms of functionality doesn’t mean his central premise is wrong. And honestly I’m a lot more disappointed with agents and brokers who want to try and argue that whole life insurance is like a Roth IRA.
Pitching whole life insurance as a Roth IRA with an unlimited contribution limit is a sign of weakness. It’s the same problem I have with 7702 Plans. I don’t think what the consumer accomplishes by buying in is bad, but if agents and brokers resorts to what I would classify as lying to get someone to buy it calls into serious question their knowledge and or ethics regarding the subject of insurance and personal finance.
Just this past week I had 5 separate discussions with people about modified reserving systems and why that explains the zero in the dividend column on a whole life illustration in the first year of the policy. When I was a career agent, everyone at the office but me considered knowing such obscure details useless.
If you have to resort to calling it a Roth IRA because you can’t confidently walk through the process of withdrawal to basis and then policy loans on gain than you should probably stick to term insurance and let those of us who know what we’re doing take care of the cash value life insurance stuff.
Remember, after the sale the client has this expectation that someone’s going to help ensure that they take money out of the policy correctly to make it work as suggested (without taxable implication), so you’d better be ready and know how to do that.
Something tells me if you are out there telling people something along the lines of “it’s like a Roth IRA only better!” you’re going to suck on the policy management side.
Simply put whole life insurance is not like a Roth IRA. They are two different savings vehicles with different benefits and drawbacks. Sure there’s some overlap, just like there is with everything. We obviously like life insurance around here, but one thing we like even more is the truth.
And if you want to hate Jim Dahle for highlighting the fact that whole life insurance is not like a Roth IRA I guess you have the freedom to do that, but he’s not wrong.
I’m teetering on ranting here, but something that comes up a lot that annoys the hell out of us is the never ending rerun of people who contact us with policies they bought “for retirement” that have almost nothing to do with cash value optimization. And we’ve been through the gamut of ridiculous claims to justify a former agent’s terrible implementation or design. Most of the time, they don’t even understand what they (the agent) did wrong.
Now to be fair, it’s not just life insurance.
We’ve seen our fair share of bad advice touching on other topics like weird investment schemes and really bad tax dodge ideas (they work beautifully until they don’t). The problem isn’t the insurance industry–it’s the human condition.
So I’ll make one final plea. To the licensed agents and brokers who frequent our site. Please be honest with your clients about whole life insurance and other similar products. And remember, if you’re not honest there is always the chance that they will find us and ask us our opinion. And we’re not going to lie to them.
Brandon launched the Insurance Pro Blog in July of 2011 as a project to de-mystify the life insurance industry. Brandon was born in Northern New England, and he currently calls VT home. He attended Syracuse University and graduated with a triple major in Economics, Public Administration, and Political Science.