Are Whole Life Insurance Policies Worth It?

Our focus within the life insurance industry is helping our clients maximize the potential for cash surrender value accumulation of whole life insurance and indexed universal life insurance policies. In fact, I'm not exaggerating when I say that we've placed dozens of policies for our clients with this goal in mind over the last few years. (Should probably do a count for an actual total at some point).

But at least a few times a week we're faced with questions like, “does it really work?”, “is it worth it?”, etc.

I should also mention, that we've helped a lot of people who thought that they were signing up for this sort of thing but understood sometime after that they got their policy that they actually got something a little different. If you want to understand more about that, read this article we wrote a few years ago. 

If you don't wanna take the time to read that article, I'll skip the salad and serve you the steak. There is a “right way” to setup whole life insurance if your primary goal is cash value growth.

That being said, we're open to the idea that a lot of poorly designed life insurance policies (those not optimally designed for cash value growth) can be pretty good wealth accumulation tools even without a highly customized design that boosts the rate of return.

Best Decision I Ever Made

As a matter of fact, we've met a lot of people who own whole life insurance and most of them didn't buy policies from us.  And most of these discussions have started without us initiating any sort sales presentation. We never had any intention of selling life insurance to them and they had no intention of buying a policy from us.

A casual conversation with a stranger sometimes results in a discussion about our professional lives and neither of us have any knack for elevator pitches or finding clever ways to tell people what we do.  “I sell life insurance,” is my description of choice–I can feel my former sales manager grimace every time I say it.

While the majority of people we talk to in a casual setting are quick to move on to a different subject, there are those who share their story. It's often been a tale of how they purchased cash value life insurance and held onto it for a while.  Fascinating stories to say the least.

Eyes light up a bit and they say something like “I have this whole life policy I bought from XYZ company back in 1970 something, and let me tell you that was one of the best decisions I ever made!”  They exclaim.


Because that boring whole life policy now has a boatload of cash value that they'd never have if they'd tried to save it some other way–by their own admission. We're not coaxing that response from people.

Just how much cash value you might ask?  Let me give you an example.

Real Numbers from Whole Life Insurance Policies

Almost three years ago, we published this piece on the subject of “badly designed” whole life insurance and how it could work out quite well.  I want to recap the numbers for this example.

That article was special for two reasons.

  1. It had substantial historical data–36 years to be exact–on a whole life policy
  2. It reported numbers from a whole life policy issued by State Farm–a company that has completely changed focus away from dividend-paying whole life insurance

We calculated the effective internal rate of return on this whole life insurance policy back then and it turns out it achieved a 6% return over those 36 years.  Could Jim (the contributor who shared the information on his whole life policy) have done better if he had invested that money in the stock market, rental property, etc?

Maybe. But who knows and would have been willing to take on the risk?

Would he have had the intestinal fortitude to stay fully invested in 2000, 2001, and 2002 when the market fell by double-digit percentages for two straight years?

Who knows if he would have stayed fully invested in 2008 when losses would have been well over $100,000 as the market “corrected.”

Take a look at this chart, it gives you a great idea of what happened in the S&P 500 during that time period on an annualized basis. It also shows you the drawdowns that happened within each year. That last data point is so important and almost nobody talks about it, we're always focused on annual returns.

However, we all have to overcome our own emotions and markets don't fluctuate in perfect synchronization with the calendar. Take a look:

The one thing Jim likely never worried about during any market decline that came after he bought his whole life policy was where his whole life insurance cash value was.  He probably also never worried about it when CNBC, Bloomberg, or any other financial media outlet speculated that this or that major news headline “spelled trouble for the stock market.”

What About Policies That are Setup to Maximize Cash?

If plain whole life policies from yesteryear have worked out pretty well, what about the ones that were customized to produce boatloads of cash surrender value?

We took a recent look at policies we've put in force to compare against the original illustrations (projected values based on the current dividend rates at that time).  Most policies have been in force for five years and a few of them were issued by companies that have since reduced the dividend paid to whole life policyholders versus the dividend assumed when the policy was bought.

No denying that there has certainly been a reduction in results vs. the original projection.  We knew this could happen when the policies were put in force.The policyholder knew this could happen when the policy was originally put in force.

The difference, however, is not all that substantial.  In raw dollars, no policy is down vs. the original projection by any more than a few thousand dollars, which on average comes out to less than 1.5% off its original projection.  From an internal rate of return perspective, this comes out to less than 0.5% difference vs. what was originally projected on average.

For one company, the dividend hasn't changed in over a decade so none of those policies have cash values that were any different than what was originally assumed as long as the client paid the premium as originally planned.

No One Seems to be all that Bothered

Despite some small reductions in dividends and lower cash value balances, we don't hear much in the way of complaints or concerns.  In fact, we've seen several policyholders take advantage of opportunities to increase premium outlay by dumping additional money into policies.  Turns out they are happy enough with how things have gone to place more money into the policies.

Does it make you curious to see how a whole life policy might work out for you? If so, feel free to reach out and have a discussion with us. Typically a short conversation can determine if it's a strategy worth pursuing.

About the Author Brandon Roberts

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.

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