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In our last post and podcast episode, we compiled the 5 Reasons Whole Life Insurance is a Bad Idea…According to the Internet. To show you that we are fair and balanced when it comes to the pros and cons, we thought it appropriate to discuss some of the scenarios or circumstance where whole life is legitimately not a great idea.
Here's the list:
- There is a current health issue or something in the medical history that prevents the insured from buying a whole life insurance policy. Now, this doesn't necessarily mean that they've been declined–maybe they received a table rating when going through underwriting. Either way, the economics do not support a high performing policy (return on cash).
Some “experts” might suggest that you just buy a policy on your children or grandchildren, use their good health to receive a favorable underwriting decision and then put all the originally planned premium into that policy. While that may seem like a really clever idea, it's not one that we've seen be executed with much success.
Now, this isn't an issue for a policy with say a $1200 annual premium…we're not talking about that. The idea here falls apart when you get into larger premium amounts ($20,000/year as an example).
Larger premiums will create a monster sized death benefit for a juvenile policy and our experience has taught us that it's difficult at best and mostly impossible to insure a child for several million dollars. And when you overfund or maximize the cash value growth in a whole life insurance policy, 20k of total premium, including the paid up additions payment, will create several million dollars of death benefit.
Surprisingly (or not) most life insurance companies aren't interested in issuing a policy that much death benefit on a child.
- Occasionally we have a conversation with a prospective client that is considering a large dump-in of cash to a new whole life insurance policy with the purpose of immediately taking a loan against the policy. If not immediately, let's say within the first six months of having the new policy in force.
While that is something a person can do with very few exceptions, we've yet to see a circumstance where it created any mathematical advantage for the client. Typically, it's an idea that someone derives because they're somewhat new to understanding the use of whole life insurance as a cash accumulating asset.
The intention of talking about this is NOT to malign any other guru that espouses the virtue of someone creating their own private banking system. Now, I've not read any of the books that teach people how to go about doing this in recent years, however, I seem to remember that even Nelson Nash (the godfather of Infinite Banking) preaches that a new policy will need a period of capitalization before a person should consider using the cash.
Again, it's not that it can't be done, it's just that we believe that it shouldn't be done if the plan is to access the cash in the short term. Whole life policies, like many other assets, have a substantial acquisition cost which is absorbed over a period of time and it's best to leave it alone for a while.
- Five years ago, premium financing was not a topic that most people had ever heard of. Obviously I don't mean that most life insurance agents were unaware of premium financing–the strategy/idea has been around for a long time.
But it's only in the last few years that we've had an influx of people asking us about it. It seems that there are quite a few people out selling premium financing as a nifty way to employ leverage to grow cash value for use some years down the road–typically for generating retirement income.
On paper, it seems feasible. Consider the following..
A client borrows $100,000 a year from the bank and pays 3% interest. The borrowed funds are used to pay the premium in a whole life insurance policy where it earns 5% and that creates a solid positive spread. What's not to like?
But it doesn't really work in any presentation that we have seen. Yes, anybody can fill in the numbers to make it seem like it will work, however, in practice any advantage that is gained on paper can easily be wiped out by a small change in any of a few variables made in the projections. The risk outweighs any presumed advantage.