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Whole life insurance revisited

June 8, 2014

One of the most maddening topics for me as an adviser has been whole life insurance for working class clients. It is clear that whole life insurance is the #1 financial vehicle of choice for the “top 5 percenters” in the wealth scale, often through the corporate entities that they control, but what about the rest of us? Should we have whole life insurance? And is it even worthwhile addressing the topic knowing in advance that any published comment is likely to be met with strong opposition by somebody.

It is not difficult to find criticism of the cost of this product in popular media.  In fact, it has been highly fashionable for financial media stars to bash whole life insurance because it is such an easy target.  A U.S. News reporter recently wrote “In 29 years as a financial planner, I’ve yet to see whole life or universal life pay off for any client.” Yet we know that realities in the financial world are not so simple. Agents for the big companies like MassMutual, Northwest Mutual, Ohio National and State Farm can point to endless examples of how their policies provided unparalleled performance to clients. As an independent adviser, do I wish to contradict the advice of TV stars? Do I want to risk having my overall advice considered to be biased based on the sharp opinions on this life insurance issue? Is it better to simply avoid taking a public position altogether, just as if this were a political or religious issue like abortion?

Based on my own 30+ years in the financial planning field both as an instructor/writer and direct client adviser, I can distill my learning about whole life insurance into four generic statements that apply to most working class people:

  1. FEATURES: Whole life insurance offers legal protections and tax benefits that are unique and unavailable through other financial planning tools.
  2. COST: It is expensive and often difficult to pay for when you first buy it, especially if you lock in rates at a young age when your income is still low. Only those who get professional financial advice and/or family advice and support are able to buy whole life insurance. Since it is a level cost and incomes tend to rise, it becomes easier to afford over time.
  3. DOWNSIDE RISK: It will be a waste of money if you cancel the policy due to a financial hardship or divorce. Again, only those who get good professional financial advice and/or family advice and support are able to avoid these disasters.
  4. LONG TERM RESULTS: If you keep the policy for the long term, you will be pleased with the performance and have no regrets. At times, it may be your saving grace or your best performing financial asset.

One question that I cannot answer in a generic format is “Is whole life insurance right for me, right now, in my situation?” The answer varies and is likely only to be clarified through the process of clarifying financial position, values and goals that is the soul of the individual financial planning process. Each client’s response is likely to be slightly different.

When clients have a difficult time deciding on the issue of life insurance, I’ve often suggested “splitting the difference” and taking just a small whole life insurance policy rather than one that provides full coverage. In fact that is what I did in my early 20s. My small policy was often difficult to afford during lean years. Yet a cash value loan from my whole life policy is what saved me financially more than once. Without it, I fear to think that I might have lost my home or even more in one of life’s unavoidable financial crisis situations when no other help was available. Now, at age 53, my only regret is that I did not purchase a larger policy when the premiums were much lower.

If you are reading this blog because you want more information, I found this brochure to be useful: http://www.massmutual.com/efiles/adv/pdfs/ad1920.pdf.

As far as disclosure, I have served as independent commissioned agent for dozens of insurance companies including all of the other companies listed in this article and am not a fan of fee-only, non-commissioned life insurance products for working class clients simply because the overall expense outlay is higher.

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