What We Really Need You to Know About Whole Life Insurance

Normally we wouldn’t spend two entire posts just dealing with one short “news” story but this story written by US News and World Report and published at MSN is so egregious we decided it deserved more time on the Insurance Pro Blog.  Just a few days back, Brandon mentioned it because of a comment to the article that inspired a review of life insurance policy loans vs. secured loan alternatives.

Today, I’m going to tackle a laundry list of things that they totally got wrong.

Now, it’s not that surprising that a major news outlet would publish garbage…is it?

No not really. However, it’s not just that the commentary or the editorializing is bad–the facts aren’t even correct.

Just a few minutes reading Wikipedia entries would have given them more factual info than they bothered to publish in the story.  And we all know everything is true that we read in Wikipedia, right?

MSN storyNonetheless almost everything else that I’ve seen published that wanted to criticize whole life insurance had some bits of factual accuracy smattered about. Not so in the case of the MSN post, it really seems that someone with a looming deadline whipped it up in less than five minutes.  Journalism at its finest, Murrow would be so proud of these hacks.

And I’ve been so proud of myself for being less cynical lately.  Oh well, my streak is breaking today…just can’t help myself with this one.

Let’s just take this bit by bit and walk through all the craziness:

There are three basic types of whole life insurance: 1. Universal. Universal life insurance is the most basic type of whole life insurance, in which some of the premium paid by the purchaser goes toward a death benefit (to be used in the event that the purchaser dies) and some of the premium goes toward savings or a very safe investment.

Universal Life Insurance is not the same as whole life insurance.  And I’m not just splitting hairs here, it’s really not the same thing.  In fact, Universal life insurance was conceived as an alternative to whole life insurance during the hyper-inflationary period of the early 1980’s.  It is a different type of life insurance with all together with different mechanics from whole life insurance.

Brandon wrote a great explanation of universal life insurance back in 2011 that still stands as one of the most comprehensive I’ve ever seen.  As a matter of fact, I often refer people back to that post when they are looking to understand universal life from the ground up.

To borrow from that post…

Universal Life Insurance (UL) is often described as having a term insurance chassis, and this is a pretty accurate description.   It’s a term policy with a savings account attached to it, and as long as that savings account has money and/or the expenses outstanding for the life insurance component are paid, the policy remains in force (compare that to term which typically has an age at which point the policy cannot be renewed). 

 There are no dividends paid on a UL policy, only interest credited to the cash portion of the account.  This doesn’t mean that the insurance company can’t pass on better than expected investment performance or better than expected mortality experience.  

 When an insurance company wishes to do this, it comes in one of two fashions, either a reduction in the term cost of the life insurance or as an increase in the interest rate credited to the policy.

 2. Variable Life. Variable life insurance is more investment than insurance because most of the premium paid goes toward an investment in the insurance company's fund. This is considered a somewhat riskier insurance choice because death benefits can be impacted by investment returns. If you want a guaranteed death benefit, you'll have to pay more toward your premium.

Umm…no.

I mean yes, variable life insurance is classified as an investment product that falls under the regulation of the Financial Industry Regulatory Authority (FINRA).  And yes, the death benefit can be impacted by investment returns.

But…

Shhh…Don't Tell Anyone About Our Secret Fund

If you choose to pay premiums on a variable life insurance policy, which come in two flavors by the way—variable universal life and variable whole life, you are NOT paying MOST of the premium toward the “insurance company’s fund”.  What does that mean anyway?

Sounds like the insurance company has some secret black box where all the money goes.  They must keep it in the same vault with the “Social Security Trust Fund” (is my sarcasm coming through?).

The investment component of any variable life contract is through a variety of separate accounts—the asset allocation is up to you.  The options typically resemble mutual funds if you want to have a cursory understanding of how that works.  You might have a large cap growth fund, a small cap value fund, an international fund etc.

Now, it’s called a separate account because it is held separately from the insurance company’s general account.  So with variable life, both VUL and VWL you are not pooling your cash value in the general investment portfolio of the insurance company, you are choosing how the money is invested amongst a menu of funds.

What’s more, it’s impossible to say that you will be paying MOST of the premium toward the investment component or cash value of the policy without knowing exactly how a person would need to structure their policy.  Some people are much more death benefit focused and thus will be paying a much smaller portion of their premium toward cash value accumulation while others will seek to minimize the death benefit so that a greater portion of their premium is used toward accumulating cash value.

This isn’t good or bad…just depends on what you’re trying to accomplish.

3. Variable Universal. This type of whole life insurance is a blend between universal and variable life insurance. It offers a guaranteed death benefit in most cases, but the portion of the premium that's not going toward the death benefit can be invested as the purchaser sees fit (within the confines of the insurance company's investment choices). This makes it more flexible than typical universal policies, but safer than typical variable life policies.

I don’t even know where to begin with this statement.  It’s so wrong in so many ways.

Variable Universal life insurance is not a type of whole life insurance—never has been, never will be.  It’s like comparing a iphone with your old rotary dial phone that you rented from Ma Bell.  Yeah, you can make calls on both of them but that’s about it.

Similarities of whole life insurance and universal life insurance:

1. Both will pay a death benefit when the insured dies.

2. See number one.

Whoever wrote this piece doesn’t understand the difference between universal life insurance and whole life insurance.  And even more, they definitely don’t understand variable universal life and variable whole life.  The good news here is that there’s really not too many people buying any type of variable life at all anymore.  The exception being some large executive deferred comp plans and/or executive bonus plans but even those plans have largely moved away from variable products.

Okay, let’s keep moving through this thing.

To put the cherry on top of this steaming pile, they give us some bullet points.  I guess because everything else was jibberish, we should just take away these few nuggets.

Let’s look at these one by one.

1.  Premiums are significantly more expensive than term insurance premiums.

Yes, this is true but considering that less than 2% of term insurance policies ever pay a claim, I’m not sure paying less is really a good thing?  Often times people are shocked at little their term premium is.

Our comment on this…”That’s because the insurance company isn’t planning on paying a claim.  If they really thought you were going to die during the term, you wouldn’t have a policy.”  Now, please understand that I don’t mean the insurer won’t pay a legitimate claim—in fact, the life insurance industry has an excellent track record of keeping promises.  I just mean that the probability of someone dying while have a term insurance policy in force is very low, it’s just math.

2.  Depending on your circumstances, you may not need life insurance for the rest of your days, meaning you could end up overspending on an unnecessary product.

Well, you may not need life insurance for “the rest of your days” but if we’re viewing the world through that lens I guess I should be concerned that I’m “overspending” on premiums for my homeowners insurance to insure a house that never burns.  Geez…what a waste!

I’m not encouraging anyone to spend more than their budget allows on insurance of any kind. However, to argue that it may be a bad deal in the long run because you never use it…just seems ignorant.  I don’t know about you but I’m kinda hoping my family doesn’t collect on my life insurance death benefit.  The implications for me are less than ideal.

3.  Many insurance companies don’t have the wide range of investment options that most people are looking for.

This may be true, can’t really say as we don’t recommend, offer or sell any variable life insurance products.  Last I looked the variable products had a fairly comprehensive list of options but it certainly isn’t the entire investment universe.

Please don’t read hack pieces like the one posted at MSN and use any of the bogus information they provide to make real decisions.  We’re always more than happy to answer questions and provide information to you that will help you make the right decision.  Just contact us to find out how we can help!


3 Responses to “What We Really Need You to Know About Whole Life Insurance”

  1. Matt Ullery says:

    I have mixed feelings about articles such as the MSN article you are referring to. There’s no doubt there has been a growing trend in financial reporting circles to paint whole life insurance in a negative light. I see it all over the place. Like you, I find the articles to be misleading and short-sighted.

    The reason my feelings on this subject are mixed is that the insurance companies and many of the agents that sell policies go out of their way to hide the high commissions on these products. I say “many” agents because there are some, like you, who design policies with a much lower commission structure that benefit the client. If the insurance companies and the majority of agents would follow suit I think these negative smear articles would mostly go away, sales would increase, and agents would find the increase in volume as a suitable replacement for the high commissions they have traditionally enjoyed.

    So in essence, much of the negative reputation of whole life insurance is well-deserved. Brandon and Brantley, you both deserve credit for your efforts to de-mystify this product and make it more attractive.

    Thanks guys!

  2. Rick P. says:

    Sorry Matt…

    But have you seen the “real” overall fee structure for many other financial products? Mutual Funds, Stocks, Bonds, you name it…the cumulative cost of ownership of financial products tends to be very similar across the board.

    Not only that…but using the income/commission that a person makes on a product (financial included) really is just a way to bash that product. When we purchase ANY other product or service…How come those sales people hide their commission? I mean…I eat at a nice restaurant, Flemings or Ruth’s Chris, shouldn’t they disclose how much profit they are making on my meal, how about when I purchase a car…shouldn’t they disclose how much the sales rep and dealership are making off of my purchase? I think it is ludicrous that the profitability of a sale should be part of the purchase decision. Compare offerings from various companies. If you feel that you are getting good value and the purchase of the product will do for you what you want it to do…then who cares how much someone makes for doing their job.

    And for the record I like Brandon and Brantley design solutions for my client without regards to what I am getting paid. I build solutions that create the greatest value for my client first and foremost…What I get paid to do so should be irrelevant.

    Sales will not increase suddenly because I am now disclosing how much I make per sale (which I do even though I am not required to do so).

    • Matt Ullery says:

      Rick,

      I am very familiar with the fee structure in other financial products, particularly mutual funds. I don’t purchase actively-managed mutual funds due to their high expenses and the impact that has on my portfolio over time. I would never even consider a mutual fund with a load in this day and age. I am not alone.

      Comparing the purchase of a financial product with other consumer goods and services, particularly luxury goods, seems ludicrous to me. In most respects, you get what you pay for in this world. That is often not the case with financial products.

      Take a look at the remarkable growth of companies such as Vanguard, who specialize in providing low-cost investment products. Why do you think Vanguard’s total invested assets have grown so much? People know a good value when they see one. Advisors who care about their clients needs first find the lowest-cost products available to them. That includes insurance products.

      I am all for fair compensation to any financial services company or representative. I don’t consider the commission structure associated with standard whole life insurance policies to be fair compensation. Many non-insurance financial people agree with me, which is one of the reasons why they hate on whole life so much.

      You are correct that your sales won’t increase just because you disclose your commission. In fact, that will probably scare a good number of people away! My argument is that sales will increase when the commission structure of whole life is reduced as a common practice and whole life gains a better reputation as a result. It takes time to build a reputation and earn the trust of consumers. Vanguard wasn’t an instant success, but it is clear to anyone who cares to look just how successful they have become.

      That’s my $.02

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