Is Whole Life Insurance a Scam?

There is a lot of information on the internet suggesting that whole life insurance is a scam. The product itself is not a scam but there are multiple ways it can be implemented, designed, and sold. The bottom line is that if you pay the premium and the policy is in force when you die, your whole life policy will pay a death benefit to your beneficiary.

Now that we've established the facts, let's tape a deeper look into the details.

Earlier this year, a video popped up on YouTube asking Is Whole Life Insurance a Scam?  The video, produced by young couple Philip Olson and Julia Lorenz-Olson, who star in a PBS show they call Two Cents, layout their thoughts on the subject.  They appear to engage in fee-based financial planning through an advisory practice they started in Texas.

I did not know about them prior to the release of the video, nor did I know about the PBS' show, in which they appear.  I didn't watch the video beginning to end when it first released, but it popped up on the radar again recently and I decided to watch and pay attention to their message.

Maybe they had something insightful to say?

Sadly, the answer to that question is no, and since I've been more than willing to criticize misguided universal life insurance attacks, a shift to focus on a poorly executed whole life insurance assault is a welcomed change on my end.

Here's the video for those who want to watch before reading what I have to say:

Whole Life Insurance Sold by Sleazy Pitchmen

The video starts with a woman flipping through channels on her television.  Every channel plays a cheesy clip of some of the television's guiltier pleasures.  Her channel surfing comes to a stop when a young man speaking in an obviously fake Australian accent asks “are you looking to make a great return on your money, but you're worried about an economic crash?”  A starburst spins dramatically onto the screen highlighting the words “Great Return.”

The screen pans to the woman with a dramatically curious look on her face.

The pitchman continues to sell on-screen and his at-home audience of one nod in ever-growing excitement in much the same way I always pictured Robert Tilton fans getting ready to send in that $1,000 prayer request.

Building excitement in a fashion that sought to mimic the best Billy Mayes Kaboom days, the on-screen pitchman finally names his wonder financial product by name…WHOLE LIFE INSURANCE!”  He exclaims with a wink.  His at-home audience member is less enthused.  Her excited face turns noticeably dubious as she merely lets out a meager “huh?”

The scene is comical, but the subtle framing is not lost on me.  Of course, this is TV, and even thinly watched (and government, don't forget the government) supported television can't help itself when it comes to sensationalized overly produced theatrics.

The message from the outset is clear, whole life is a scam sold by sleazy pitchmen and we're going to explain all the reasons it's bad.  Truth is, you can hold that opinion if you want.  In fact, this wouldn't be a new sentiment from a pretend financial advisor appearing on PBS.  Suze Orman peddled this message for at least the past two decades on PBS specials.

So if you're going to come on so strong against whole life insurance, I expect you to come to the table with some airtight logic in your argument.  And that, you'll see, is where this one falls off the rails.

Were You Pitched Whole Life Insurance as an Investment?

The Olsons begin the discussion about whole life insurance by noting you may be thrown a curveball by your financial advisor when he/she recommends you invest in whole life insurance.  They even have some data on how often this might be happening.

They note that when they asked, 30% of survey respondents said an advisor recommended they buy whole life insurance.  Here's a screenshot of the screenshot they shared in the video:

Is Whole Life Insurance a Scam Two Cents PBS

Apparently, this means there's a widespread practice of financial advisors out there telling their clients to buy whole life insurance.

Wait…the total votes cast in this very scientific survey conducted on Twitter is…38?

As of July 27th, the Two Cents Twitter account has 1,493 followers.  I don't know how many followers they had back in December 2019 when they posed the question.  Perhaps they gained many followers throughout the beginning of 2020 making these 38 respondents a significantly higher percentage of their overall Twitter base?

Regardless, the fact remains that 38 respondents are hardly a sufficient sample size to make any claims.  Follow that up with the fact that this is a poll conducted on Twitter, and we can definitely toss this piece of evidence from the record.

The History of Life Insurance

At about two minutes into the video, the Olsons decide to give viewers an overview of where life insurance started.  What this has to do with whole life insurance's status as a scam, I couldn't ascertain, but they do mention that the primary purpose of life insurance is to protect from financial loss when someone dies.  They note that 59% of Americans own some form of life insurance, and source this statistic from the 2018 Insurance Barometer put together by The Life Happens Foundation and LIMRA.

They then go on to claim that term life insurance is the most common type of life insurance and they give an overview of how term life insurance works.  But interestingly, there's no source cited for the claim that term life insurance is the most common type of life insurance.  I've been selling life insurance for over 12 years now, and I'm not aware of any data that definitively declared term life insurance the most common type of life insurance.

Actually, Google disagrees.  See for yourself what I saw when I googled it:

Most common type of life insurance

Now I'm not saying that Google is, in fact, that arbiter of truth on this question.  I'm just pointing out that there is some question on what is the most common life insurance, and the Olsons seemingly “forgot” to cite a source for their proclamation.

After explaining term life insurance, the couple dives into an explanation of how whole life insurance works.  The depiction is very scant on details, but I'll give them a pass since I'm assuming they were trying their best to to make this information as approachable as possible.

Infinite Banking and the Silver Bullet!

After a basic explanation of whole life insurance, the Olsons bring up the notion of Infinite Baking et. al.  and give a very brief overview of how it's marketed.  Then Julia explains that “advocates of whole life insurance treat it like a financial silver bullet for your needs.”  She does this standing next to a television with a 90's-esque graphic bouncing back and forth reading “investaWOW.”

Philip then returns to his pitchman character complete with a fake Australian accent to reinforce the platitudes of an eye-rolling whole life pitch.

Life insurance without an expiration date!

A tax-deferred investment for your future!

Fire your banker and loan money to yourself!

He exclaims.

Then his wife asks, “how could term life hold a candle to this?

So they decide to…run the numbers!

Now, before we dive into running the numbers, can we take a timeout and note how dumb it is to compare whole life insurance and term life insurance?

Like they are really competing with each other?  In the nine years, I've been running The Insurance Pro Blog I've gone out of my way on to mention that life insurance policies are uniquely designed to address specific needs related to the purchase of life insurance.

Further expanding on that, we've very clearly explained several times that the reasons to buy term life insurance are not similar to the reasons to buy whole life insurance.  Anyone who suggests they are is an idiot.

Had the Olsons simply pointed this out (and make no mistake about what I'm saying, there are PLENTY of insurance agents dumb enough to think/pretend that term life insurance and whole life insurance are interchangeable) I could have given them a big thumbs up.

But they didn't.  They instead fought stupid with more stupid and proceeded to set the stage one of the most careless buy term and invest the difference arguments I've seen in some time.

Let's Run the Numbers

Making a reference to a 90's sitcom, the Olsons present two sisters who are looking to buy life insurance.  One opts for whole life insurance and the other term life insurance.

They begin with the sister who buys whole life insurance. Her premium will be $563/mo for a $500,000, which they claim is the national average–no source is given for this.

The cartoon character representing the sister's eyes grow big when they announce the $563 monthly premium.  The signaling that this is a substantial premium.  They note that she is attracted to the cash value growth of the whole life policy, but then caution her to hold on.  That the 5.5% dividend on her whole life policy only applies to her cash value, not to the total amount of premiums she pays.  This statement is more or less correct regarding dividend functionality.

Julia then goes on to explain that according to a 2015 Consumer Reports Study the net return achieved by most whole life policyholders is closer to 2%.  I'm very familiar with that Consumer Reports “study.”  I wrote a blog post about it just last year.  In that article, Consumer Reports didn't determine anything about what a typical policyholder might expect to achieve regarding rate of return on cash value.

The author of that article merely used the guaranteed ledger for comparison sake and claimed that it made sense to do that because dividends aren't guaranteed.  That statement is incredibly asinine, and you can read my comments on why in the blog post I wrote.

Despite misinterpreting the intent of the Consumer Reports study article, the Olsons proceed to project the whole life sister's cash value in 30 years based on this 2% figure compounded annually.  They note that she'd have just over the sum of the premiums she paid by age 70 and that she'd also have her $500,000 original death benefit.

They then turn their focus to the term life buying sister.  She'll pay just $52 per month for term life insurance and she'll take that difference between $563 and $52…$511…and she'll invest it every month in a “basic stock index fund” where she'll “probably average over 7%.”  There is no source given for where they came up with this 7%.

The Olsons then compute the term life sister's investment account balance at $619,780 when she turns 70. Philip notes, this is twice as much as the whole life sister got in cash value inside her whole life policy.

Notice the Olsons sought out “data” whenever they wanted to throw shade at whole life insurance, but never bothered to support their claims for the superiority of recommended alternatives with any actual data.  Also, let's not overlook how questionable the data sources are.

So far we've seen data to support the claim that whole life insurance is rabidly pitched by advisors.  A claim supported by a laughably small pool of Twitter users.  And then they presented data to support their low-balling extrapolation on whole life cash values supported an article presented as a “study” that doesn't remotely state what they claim it does.  I'm not bold enough to outright claim the Olsons intentionally use sources as a fake to appear more legitimate, but I'm having a hard time rejecting the notion given their behavior.

What if we took data from a third-party source on anticipated investment returns and used that same data to project values in this example?  DALBAR tells us the 20-year return for an equity fund investor is 4.25%, which is significantly less than 7%.  Ignoring any sort of fees or taxes, that would place the term sister's investment balance at about $359,000 when she turned 70.

If I designed the whole life sister's policy to maximize the cash value of the policy, she'd potentially have almost $481,000 in cash value and $959,000 in death benefit, which is substantially more death benefit than originally planned.  And, she could stop paying premiums at age 70 without losing her death benefit.  That doesn't sound all that horrible to me.

Why Advisors Recommend Whole Life Insurance?

Now stop me if you've heard this one before…

It turns out that financial advisors recommend whole life insurance because they are obsessed with the crazy high commissions they earn by selling you a policy.  Philip claims to have experience in the industry where he was encouraged to sell high commission whole life insurance over other financial tools.  Maybe he did.  That alone doesn't mean every person with an insurance license only wants to sell whole life insurance because of the commissions.  And anyone, the Olsons included, who advocate for one financial idea or another stand to make money on their recommendation.

Notice here also that Philip claims sufficient experience to know that whole life insurance is primarily sold to earn commissions, but some how lacks the knowledge to question Consumer Reports bogus suggestion that dividends are unlikely, or if dividends are earned, this will very likely result in a death benefit higher than the original guaranteed death benefit on a whole life policy.

If someone recommends whole life insurance only because it's the option that pays him/her the most amount of money in commissions then that person is certainly awful.  The existence of awful people doesn't mean everyone engaged in similar business activity is also awful.  The Olsons presented no evidence that everyone selling whole life is doing it just to screw people and make lots of money in commissions.  Hearsay doesn't count as evidence.

There are Some Situations that Warrant Whole Life Insurance

Near the end of the video, Julia comments that there are some situations that might make sense for whole life insurance.  These include things like having a child with special needs or having substantial assets and needing whole life insurance for various wealth transfer purposes.

There are, I can assure you, several more circumstances where whole life insurance fits into someone's life.  The attempt to appear objective by paying whole life a small compliment, but excluding its applicability to rare circumstances doesn't win any points in my book.  It also further puts on display their ignorance concerning the subject.

Now, let me also take a moment to be perfectly clear about something.  I do believe there are several valid arguments against whole life insurance and permanent life insurance in general.  While I find much value in what it has to offer, I'm not so blind to the complexities of the world that I'll suggest it's right in all cases.  But if you're going to argue against whole life insurance, you need to do more than make a decades-old argument backed with shady sources for only half of the points you intend to make.

Your personal experience (relatively short at that) being able to sell whole life insurance doesn't come close to representing the data needed to truly substantiate the claim that whole life insurance is primarily sold because salespeople want to earn high commissions.

The video sought a clean honest image to explain the truth behind whole life insurance.  But that façade covers a wildly ignorant couple seeking to opine on a subject they are either too careless or too inexperienced to truly tackle.  And one of them happens to be a fiduciary.  This is yet one more example of the hypocrisy about which we've complained for years.  Bad advice, no matter how well-intentioned, is still bad advice.

Ultimately, the video is well-produced propaganda; the irony is that it is the real scam.

8 thoughts on “Is Whole Life Insurance a Scam?”

  1. Hi Guys, nice blog post. Actually PBS does have a show that talks about (and actually promotes) WL. I’m in CA and on the two local PBS stations, sandwiched between showing of Suze Orman’s show they show Ed Slott who promotes “forever taxed to never taxed.” He promotes Roth IRAs and WL insurance. He gives it a good overview and fair treatment, not something I would have thought PBS would have allowed….

  2. Ok I agree with you on the fact that this is biased, but are you not doing the same thing? I mean on the commission fees part could you show us numbers? Like cost of insurance vs how much is going into the cash value vs fees, taxes etc?

    • Whole life when structured properly for cash value can be a good idea. Simply because, you can earn dividends that are not tied to the stock market, you can have access to the cash value tax free and the life insurance when you die is tax free to your heir. It is not a short term strategy, it can take around 10 years for your cash value to overtake the premiums you have paid in. But over 20 to 40 years the compounding will be hard to beat with another strategy.

      • This is true. But the reason insurance companies can afford to provide such a favorable return over a 20- to 40-year time horizon is because they know that only a small fraction of policies will actually be in force that long.

        The vast majority of whole life policies are surrendered early—many within the first five years—and in that scenario the insurance company wins. Many policies even include additional surrender penalties to further augment carrier profits.

        Everyone thinks they are going to be one of the few who are disciplined and manage to follow the plan for 40 years, but the actuaries know better.

        • What is the “vast majority” and what source are you using to make that claim? Further, why does the insurance company win if this happens? Does the insured/policy owner not have life insurance coverage during this time? Does he/she never derive any other benefit from owning such a policy over this time period?

          Also, how many policies are, in fact, surrendered as you suggested that were purchased for the primary intent of building cash value versus some other reason? And how many of these supposed policies surrendered within five years can we classify in the Final Expense life insurance category–a category with a much higher lapse rate and little to no application of cash building life insurance in this context?

          As far as those who think they’ll follow a plan and fail–presumably resulting in less than ideal circumstances–does the same phenomenon not exist in every other pursuit of wealth accumulation through alternative options?

  3. That Google result is very misleading.

    You typed “most common type of life insurance” into the search bar, and Google’s top result was a site stating that “Whole life insurance is the most common type of permanent life insurance policy.”

    Of course, this is not relevant to your question, because your intent was to ask whether whole was more or less common than term—not whether whole was more or less common than the other types of permanent life (universal, variable).

    • I’ve been waiting for almost a year for someone to bring this up. The fact that you were the first proves a point I was making. Google confused the query, and the result that used to answer that question was of questionable legitimacy. That said, people rarely dig deeper.


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